Congress will likely go over the fiscal cliff come March 1 without taking action to avoid $1.2 trillion in automatic spending cuts, according to an Ivy League professor speaking at an investment conference that concluded on Tuesday.
Presenting at the Investment Management Consultants Association's 2013 annual meeting in New York City, Harvard Business School Professor Robert Pozen told the assembled IMCA members that Congress will permit $1.2 trillion in sequestration cuts. To be evenly divided between domestic and Department of Defense appropriations, the sequestration cuts are probable because of the lack of political will to reform entitlement programs and slash the DOD budget.
Turning to Social Security, which is projected to become insolvent in 2033, Pozen said the program could be put on a financially sound footing by shifting the method by which payments to Social Security recipients are determined from the Consumer Price Index to "Chain CPI." The latter, Pozen said, is a superior method for calculating the costs of goods and services because it factors in substitutions that people make as prices rise.
A second option – switching the formula for calculating an individual's initial Social Security benefits from wage-indexing to price-indexing – would "wipe out" 100 percent of the $8.6 trillion Social Security trust fund deficit. That's because, over long periods, wages grow about 1 percent faster than prices when factoring in both household consumption and savings.