Already, budget-cutters are taking aim at Social Security. Yes, the way to calculate cost-of-living adjustments — the chained CPI, unfriendly in name and in its impact on retirees — is already back in the picture (see related video).

But it’s just plain wrong to blame this particular program for our budget deficit — a fact that has been understood by political leaders from Ronald Reagan to Tip O’NeilI.

Of course, we all want to reduce deficits and help keep our nation’s fiscal house in order. But here are some important things to keep in mind, as Congress and the White House hunker down for a new battle over spending:

• Social Security is not the cause of America’s budget deficit. In fact, it’s a self-financed program that’s separate from the federal budget. Workers and employers finance the Social Security program by paying a 6.2% payroll tax.

• Social Security still has a large surplus. Its trust funds hold $2.8 trillion in special-issue Treasury bonds. These assets are backed by the full faith and credit of the United States.

• The trust funds can only be used to pay Social Security benefits.

Social Security does face a long-term shortfall, but that fact should not be exaggerated or distorted. According to its trustees, Social Security can pay all benefits through about 2033 — and 75 percent after that.

So, we do need a debate on Social Security. But we need the right kind of debate.

It should focus on retirement security for older Americans today and young people who will need retirement security in the future.

It should be about keeping Social Security financially stable for the 21st century. But it should also recognize the critical importance of Social Security at a time when employer pensions have become scarce and millions face financial uncertainty in old age.

A political deal to meet numerical targets is not the way to conduct this debate – something that our political leaders have always understood. As Ronald Reagan put it: “Social Security has nothing to do with the deficit.”

In the weeks ahead, this reality is likely to be glossed over by politicians who will try to pin at least part of the blame for our budget woes on the program that’s the lifeline for nearly two-thirds of older households.

Don’t let ‘em fool you.

Each year, the program considers how prices are rising [as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers]. If prices go up, the Social Security benefits people have earned tend to be adjusted as well.

For a typical household, this protection is huge – a point I tried to emphasize in my book, “Social Security for Dummies.” It helps people keep up their standard of living as the years pass. Otherwise, inflation will eat it away. In 20 years, an inflation rate of 3% would cut a dollar almost in half [to 55 cents]. And, of course, this process doesn’t stop.

So any change to Social Security’s inflation protection is a potentially serious matter.  

Which brings us to a proposal known as the chained CPI (see related video). Some in Washington want to use this index as the way to compute Social Security’s cost-of-living adjustments – and save money – in the coming years.

The chained CPI yields smaller cost-of-living hikes than the current gauge – about 0.3 percentage points less per year. That’s because it assumes that when prices go up, consumers have greater ability to substitute purchases across categories.

It’s a theory that may work when you’re talking about buying chicken breasts instead of prime rib. But it’s dubious for health care services, a very large expense for many who depend on Social Security, including older Americans and people with disabilities.

Under a chained CPI, the oldest beneficiaries would lose the most. In fact, retirees lucky enough to live to 92 would lose a month’s worth of benefits, compared to current law. Workers with disabilities and other long-term beneficiaries also would end up with a lot less.

The reductions with a chained CPI would disproportionately affect the poor, who may get all their income from Social Security, and women, who generally live longer than men. The oldest widows, many of whom barely scrape by, would be among the main losers.

Importantly, the chained CPI would affect current beneficiaries, with its impact growing the longer they live.

In writing “Social Security for Dummies,” I became acutely aware of how important this program is for millions of Americans, especially at a time when retirement security is a fading dream for so many.

So it’s vital to consider options that will keep Social Security strong for the long term. That’s an important debate for our country to have, and various ideas have been put on the table.

But weakening Social Security’s safeguard against inflation takes a financial toll on those who can least afford it: current retirees who count on that income, and others who have worked hard for their benefits.

Photo commemorating the Social Security Act’s passage taken at The Franklin D. Roosevelt Library in Hyde Park, NY, by Wally G (shared via Flickr Creative Commons)

But this question only gets at part of the story: Social Security is a kind of insurance, not just an investment. It protects you and your family from things nobody wants to think about — death and disability. In other words, it contributes to well being and peace of mind in ways that may be impossible to measure.

A few months ago, Social Security’s actuaries looked at the question of whether people get a positive return on their payroll taxes, as noted in this Reuters article.

They found that in the great majority of cases, for people born between 1920 and 2004, the answer is yes.

Individual factors make a difference. The longer you live, the more you get back. Low earners tend to get larger returns, because of the progressive design of the benefit formula. High earners tend to get lower returns for that same reason.

Although the future is less certain for young people,  the Social Security analysis found they also would get positive returns. That’s even with potential changes to program, such as higher payroll taxes or reduced benefits.

You can look at the “deal” you get from Social Security in other ways. Earlier this year, an AARPanalysis found that a worker would need $386,000 to buy an annuity that guarantees income equal to Social Security’s average retirement benefits. In the past, the Social Security Administration has compared its disability protections to insurance with a face value of $329,000 (for a typical family), and its survivor benefits to a life insurance policy worth $476,000.

Unlike investments on Wall Street, Social Security benefits are guaranteed by law and adjusted for inflation. They continue until you die and may cover your dependents for years after that.

These insurance protections built into Social Security are sometimes overlooked in the public debate. But if you stop to think about what Social Security means to you – not just today, but in a future that comes with risks – they are worth remembering. They are all part of its value.

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Want to know more about Social Security? Check out our online resources. If you have benefit-related questions try AARP’s Social Security Q & A tool, and learn about  our book, Social Security for Dummies.

Photo courtesy of Calignosus via Flickr Creative Commons

The good news is that whatever your question, the odds are that someone else has asked it already.

AARP has logged more than 11,000 questions about Social Security – and now there is an online tool to give you the answers on topics relevant for you.

Curious how your retirement benefit is calculated? Would you like to know more about benefits for spouses – or an ex-spouse? Wonder how Social Security decides when to pay a cost-of-living adjustment? AARP’s new Social Security Q&A Tool has answers on these topics and a multitude of other questions.

The interactive tool is organized by topic. Go to Q&A Tool and begin typing in the search term you’re interested in, then select the one you want. Click to submit and in seconds, your screen will display relevant questions and links to answers.

When I searched under “eligibility,” 12 questions and answers popped up on a range of issues, including how long you have to work to claim benefits, how soon a newly married person might qualify for a spousal benefit, and others.

When I searched under “apply,” the AARP tool produced six questions and answers, covering how to file for benefits, how soon your payment will arrive, Supplemental Security Income and other matters.

The new tool isn’t the last word on every query about Social Security. If you have an unusual or tricky personal issue, you should contact the Social Security Administration or go to www.socialsecurity.gov. Another source of information is a book I wrote, “Social Security for Dummies.”

Why does this  topic matter? Many people don’t realize that mistakes and misunderstandings could cost you thousands of dollars over a lifetime. One way or another, it makes sense to do your homework on this important topic. And with online tools making it easier than ever, there is no reason not to. ###

Contemplating retirement and ready to roll up your sleeves on Social Security and more? Explore AARP’s five-step Ready for Retirement resource center. 

Photo by entr’acte courtesy of Flickr Creative Commons