President Barack Obama signaled during his first debate with his Republican opponent Mitt Romney on Oct. 3  that he was willing to consider a change in Social Security benefits.

He said, “It's going to have to be tweaked the way it was by Ronald Reagan and Speaker -- Democratic Speaker Tip O'Neill” in their 1983 deal that raised Social Security taxes and pushed up the eligibility age for collecting full retirement benefits from 65 to 67.

Now Obama has put forward his “tweak”: changing the formula used to increase Social Security benefits every year – a switch that would result in retirees getting a smaller increase in benefits than they would get under the current cost of living formula.

The average Social Security benefit for a retired worker is about $1,230 a month.

Beneficiaries will get a 1.7 percent increase in benefits, or a cost of living adjustment (COLA), in January to compensate them for the effects of rising prices. Beneficiaries got a 3.6 percent increase in 2012 but got no increase in 2011.

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Protesters rally in Florida against cutting Medicare/Social Security benefits.

The Social Security benefit increases are pegged to the consumer price index for urban wage earners, a measure called CPI-W, which is calculated by the Bureau of Labor Statistics. If prices drop, Social Security benefits do not get reduced.

Obama proposes to change to a different measure called “chained CPI” which attempts to reflect how consumers adjust their mix of purchases as the prices of different items change: for example, if the price of spaghetti was surging while the price of men’s shirts was unchanged, you might decide to buy somewhat less spaghetti and more shirts. You won’t stop buying spaghetti entirely and spend every last dollar on shirts, but you will adjust your consumer mix.

Jason Fichtner, the former chief economist of the Social Security Administration who now teaches at the Georgetown University Public Policy Institute, said the COLA which took effect in 2009 was a 5.8 percent increase using the current formula. If the chained CPI measure had been used, the increase would have been 5.2 percent.

On average, the difference between the current COLA and a COLA using chained CPI would be about three-tenths of a percentage point per year: so if under the current formula, beneficiaries would get a 1.5 percent increase in a given year, they’d get a 1.2 percent increase under a chained CPI formula.

“In times of high inflation, beneficiaries will still get a large increase; it just won’t be as much,” Fichtner said. “Everyone is still going to get a benefit increase -- both a nominal increase and a real increase to keep up their purchasing power.”

He added, “Depending on the measure of inflation you use, you can make the argument that we have been giving people a higher adjustment than is warranted, based on inflation and the change of consumer behavior to adjust to price. What this (chained CPI) does is just bring it back to a more realistic or accurate measure.”

Because there are so many Americans who collect Social Security benefits (56 million), because the number of recipients keeps growing by about 3 percent a year, and because Social Security is the single biggest spending item in the federal budget (more than one-fifth of all federal outlays), even a modest change – or “tweak” as Obama would say – would result in a significant reduction in spending.

Last year the Congressional Budget Office estimated that switching to the chained CPI formula for Social Security recipients would cut spending by $112 billion over 10 years (2012-2021).

If this switch in the COLA formula were applied to retired federal workers and to military retirees and their dependents it would save an additional $24 billion over ten years.

Obama’s proposed change would not be a cut in actual dollar terms in Social Security benefits – it would not mean a recipient who had been getting $1,230 a month would now get $1,150 a month. But some Social Security proponents still contend it will cause some hardship for some people. A calculation last year by the National Academy of Social Insurance found that a COLA that is 0.3 percentage points lower each year would result in a monthly benefit that was about 8.4 percent lower (than it would be under the current formula) by the time a retiree reached age 92.

In an analysis last year the CBO said, “An argument against reducing the COLA is that the prices faced by Social Security beneficiaries could rise faster than prices faced by the population at large. For example, beneficiaries are likely to spend more than younger people do for medical care, the price of which generally outpaces the prices of many other goods and services.”

In an interview with NBC’s Andrea Mitchell Tuesday, House Democratic Leader Nancy Pelosi said, “the details of this are not all ironed out, but they all mitigate for helping the poorest and neediest in our society, whether they are SSI (Supplemental Security Income) recipients, whether they’re 80 and older or whether the truly needy in between.”

She said some statements by Democratic House members opposing Obama’s chained CPI proposal were not indicating total opposition, but opposition only if the final accord to be signed by the president did not provide exemptions for certain categories of the kind Pelosi mentioned.

But Eric Kingson, co-chairman of a group called Social Security Works and a professor at Syracuse University who served as an advisor to the 1982-83 Greenspan commission on Social Security Reform, said. “It’s a terrible idea. You can dress it up any way you want. It’s a benefit cut and it violates the promise that Leader Pelosi made, the president made, and almost every politician – Democrats and Republicans -- made that they would not cut Social Security benefits.”

He said the purpose of the COLA is to ensure that benefits maintain their purchasing power throughout your lifetime. He said for a beneficiary who retires at age 65 and reaches age 95, he or she will have lost $18,000 in benefits compared to what he’d get under the current system.

Kingson said he worked as a “very active volunteer” for Obama’s re-election and respects him, but “this is going to get an awful lot of people very upset…. It fosters a lot cynicism if we now move to cutting Social Security.” He said the Obama White House “probably doesn’t understand how critical this system is to regular Americans.”

Until Wednesday night’s debate, the 2012 campaign had focused almost exclusively on one entitlement program -- Medicare.

But debate moderator Jim Lehrer steered the conversation back to Social Security by prompting President Barack Obama and Republican presidential nominee Mitt Romney to discuss the future of the program on which 55 million Americans rely for monthly payments.

Michael Reynolds / AFP - Getty Images

President Barack Obama and Republican challenger Mitt Romney participate in their first debate at the University of Denver in Denver, Colorado, October 3, 2012.

It’s a bit odd that Social Security hasn’t played a bigger part so far in the campaign: after all, the federal government spends more on it than on any other program.

And the $2.7 trillion in Treasury bonds which Social Security holds as assets are also future taxpayers’ liabilities. In the coming decades those bonds will need to be paid off by taxpayers, placing a strain on the entire budget since every dollar which goes to redeeming the bonds is a dollar which cannot go to national parks or Pell grants to needy students – or to Big Bird (public broadcasting).

“Social Security is structurally sound,” Obama told Lehrer. “It's going to have to be tweaked the way it was by Ronald Reagan and Speaker -- Democratic Speaker Tip O'Neill. But it is -- the basic structure is sound.”

Previously Social Security got fleeting attention in the campaign for a comment Vice President Joe Biden made to a man in a Virginia coffee shop in August when he said, “I guarantee you, flat guarantee you, there will be no changes in Social Security." It wasn’t clear whether Biden meant no changes for anyone at all -- or simply no changes for those currently getting benefit payments.

Jason Fichtner, the former chief economist for the Social Security Administration who now teaches at the Georgetown University Public Policy Institute and is a research fellow at the conservative Mercatus Center at George Mason University, said Obama’s statement in Wednesday’s debate “is a huge departure from Vice President Biden's recent statement that Social Security is fine and that the Obama Administration would not support any changes to Social Security. It's refreshing to see the president recognize the need for some reform to Social Security in order to maintain the solvency of program for future generations.”

He added, “And now I'm really eager to see how Vice President Biden answers a Social Security reform question when he debates Congressman Ryan next week.”

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Since Obama cited the 1983 deal between Reagan and O’Neill as a model, it’s worth examining the “tweak” that those two men agreed to 30 years ago.

The 1983 accord extended the solvency of the Social Security program – which was at that point only six months away from default— by cutting benefits for future retirees and by raising taxes.

The 1983 law:

• Gradually raised the eligibility age for full retirement benefits from 65 to 67 for people born in 1938 and after. This had the effect of cutting expected benefits for workers born after 1937.
• Accelerated an already scheduled Social Security payroll tax increase.
• Raised the payroll tax rate on self-employed people from 8.05 percent to 11.4 percent. For someone making $50,000, that worked out to a $1,675 tax increase.
• Imposed the income tax on up to one-half of the Social Security benefits received by higher income beneficiaries.
• Reduced benefits by delaying a cost-of-living increase for six months.

According to Social Security historians John Shoven and Sylvester Schieber, “In patching things together for the 1980s, the (1983) plan offered roughly thirty years of smooth sailing.”

That 30-year period is now coming to an end and another “tweak” or overhaul is needed to keep the system fiscally viable.

In their most recent annual report, the Social Security Trustees said that the Disability Insurance fund will run dry in 2016 and that the retirement and survivors’ fund will be exhausted in 2035. At those exhaustion dates, each fund will be able to pay only about 75 cents of every dollar in promised benefits.

Fichtner sees the 1983 model as a mixture of good and bad policies. “On the one hand, the 1983 reforms brought together Democrats and Republicans in order to pass bi-partisan reform. That's good,” he said. “On the other hand, the deal resulted in payroll tax increases. That's bad. I fundamentally think that payroll taxes are too high and don't need to be raised.”

Fichtner said Congress can adjust the program by raising the retirement benefits eligibility age for workers who are now under age 50 and by changing the formula used to determine cost-of-living increases in benefits.

In Wednesday night’s debate, the focus on Social Security lasted only a minute and then switched back to Medicare, so Romney never did address Social Security.

But his position during the campaign has been, as he said in a speech in February, "When it comes to Social Security, we will slowly raise the retirement age. We will slow the growth in benefits for higher-income retirees." He also said, “Tax hikes are off the table, and there will be no change for those at or near retirement.”

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Obama has said he would get new revenue to pay benefits by increasing Social Security taxes on upper-income people.

The current formula pegs the benefits that will be paid out upon retirement to the taxes a worker has paid during his or her career. Only earnings up to a maximum annual amount ($110,100 in 2012) are subject to the payroll tax. But there’s also a maximum retirement benefit: for a worker retiring at age 66 in 2012, the annual amount is $30,156.

If Congress adopts Obama’s proposal and raises the amount of earnings that can be taxed, then it would also need to decide whether to keep pegging benefits to taxes paid: would upper-income earners get higher retirement benefits in return for their higher Social Security tax payments? Or would the tax increase be used simply to keep the system fiscally solvent?

Lehrer’s refocusing the candidates on Social Security was a useful reminder than the great tax debate of 2013 may need to consider not only the income tax burden but the Social Security tax as well.

Updated 5:30 p.m. - Vice President Joe Biden told cafe patrons in Virginia on Tuesday that he could "guarantee" he and President Obama would allow no changes to Social Security.

As a debate over reforming entitlements -- particularly Medicare -- takes center stage in the 2012 presidential campaign, Biden seemed to promise not to allow changes to the program.

"Hey, by the way, let's talk about Social Security," Biden said after a diner at The Coffee Break Cafe in Stuart, VA expressed his relief that the Obama campaign wasn't talking about changing the popular entitlement program.

"Number one, I guarantee you, flat guarantee you, there will be no changes in Social Security," Biden said, per a pool report. "I flat guarantee you."

The pool report noted that most of the patrons at the cafe toward whom Biden was directing his remarks were over the age of 60.

The vice president's language almost hearkens back to some 2011 tough talk by Senate Majority Leader Harry Reid (D-NV), who vowed not to take up changes to Social Security for another two decades, by which time he might not even be a senator anymore.

"Two decades from now, I'm willing to take a look at it, but I'm not willing to take a look at it right now," Reid said at the time in an interview on MSNBC. "It is not in crisis at this stage. Leave Social Security alone. We have a lot of other places we can look that is in crisis. But Social Security is not."

Mitt Romney has expressed an interest in gradually raising the retirement age, as well as means-testing benefits for the wealthy, but he otherwise hasn't specified his own Social Security proposals.

Presumptive Republican nominee Mitt Romney and his newly-named running mate, Wisconsin Rep. Paul Ryan, have made clear that they are doing more than defending their proposed changes to Medicare.

They’re welcoming the debate.

"President Obama is actually damaging Medicare for current seniors. It's irrefutable," Ryan told Fox News in an interview set to air this evening. "And that's why I think this is a debate we want to have, and that's a debate we're going to win."

That's a charge echoed in a new television ad released Tuesday by the Romney campaign, which charges the president with cutting $716 billion from Medicare at the expense of current retirees. (These cuts, which were enacted through health care reform, are largely used to pay for the costs of the new health reform law.)

Justin Sullivan / Getty Images

Republican presidential candidate Mitt Romney speaks during a campaign rally at American Energy Corportation on August 14 in Beallsville, Ohio.

The Romney campaign's newfound eagerness to engage President Obama on Medicare appears to draw more from Republicans' 2010 playbook than anything else.

But the strategy raises the question: Can it work -- again -- after Republicans passed the Ryan budget plan in 2011 and 2012?

The Romney campaign has gambled that it will.

"You see, when he ran for office he said he’d protect Medicare, but did you know that he has taken $716 billion out of the Medicare trust fund – he’s raided that trust fund – and you know what he did with it? He’s used it to pay for Obamacare – a risky, unproven, federal government takeover of health care," Romney said Tuesday in Ohio. "And if I’m president of the United States we’re putting the $716 billion back."

Going on offense against Obama -- even with a strategy that is now two years old -- might prove to be the best way for Romney to defray the inevitable attacks he invited by adding Ryan, the GOP budget guru, to the ticket.

But arguably the most significant shift in the debate over entitlements during the last two years came in the form of two budgets authored by Ryan in his capacity as chairman of the House Budget Committee. Those proposals call for major changes to Medicare, principally by transforming it into a voucher (or "premium support") program for future retirees who are currently under the age of 55.

"The truth is that the Romney-Ryan budget would end Medicare as we know it: people with Medicare would be left with nothing but a voucher in place of the guaranteed benefits they rely on today," said Obama campaign spokeswoman Lis Smith. "And they do it all to pay for massive tax cuts for millionaires and billionaires – the very same top-down economic scheme that crashed our economy and devastated the middle class in the first place."

Clouding the matter, though, is Romney's apparent disavowal of elements of Ryan's own plan, despite having previously said that he would sign the Ryan budget into law if it were the plan Congress were to send him.

For instance, Ryan's budget proposals leave in place the $716 billion of cuts to Medicare that Romney has vowed to restore.

The presumptive Republican nominee’s campaign has made clear since Saturday, when Romney formally named Ryan as his running mate, that the two budgets authored by Ryan during his time at the budget committee don’t fully represent Romney’s views.

The candidate himself made that much clear on Monday, when he told reporters in Florida that his own plan for Medicare is “very similar” to Ryan’s, though not exactly the same.

“We haven’t gone through piece by piece and said, ‘Oh, here’s a place where there’s a difference,’” he said, explaining that he couldn’t immediately recall an area of explicit difference.

Romney's website saysthat his plan "almost precisely mirrors" a proposal put forward by Ryan and Oregon Sen. Ron Wyden, which would move forward with a premium support plan, but allow future retirees to maintain existing Medicare benefits as an alternative option, but in competition with private plans and with premium levels meant to cover its costs.

But Romney and Ryan, so far, haven't emphasized this alternative, relying instead upon criticizing Obama's own cuts to Medicare.

NBC's Alex Moe contributed

Updated 4:05pm ET The trustees of the Social Security system said Monday the fund that helps sustain retiree and survivors’ benefits will become exhausted in 2033, three years sooner than they projected last year. 

At that point, payroll taxes and taxation of Social Security benefits will provide only enough income to pay about 75 percent of the benefits that Congress has promised to retirees and survivors.

In practical terms, this means that a 40-year-old worker who is eligible to collect retirement benefits in 2039, would see his or her expected retirement benefit cut by about 25 percent, unless Congress took action to change the program’s funding or its benefit structure.

The trustees attributed a big part of the change in their forecast to “slower growth in average earnings, lower interest rates, and higher unemployment rates due to a longer period of recovery from the recent recession,” as well as to a 3.6 percent cost-of-living increase in Social Security benefits last December.

Last year, Social Security paid benefits of $725 billion. There were about 55 million beneficiaries.

In their annual report, the trustees also estimated that Social Security’s Disability Insurance fund will be exhausted in 2016, two years sooner than last year’s estimate. Congress will need to take action to avert that outcome, with the most likely remedy being a reallocation of the payroll tax between the part of the tax that supports Social Security’s retirement and survivors’ benefits and the part of the tax that pays for disability benefits.

The Social Security system does have assets in the form of $2.7 trillion in Treasury bonds -- but those assets must be redeemed – cashed in – in order to pay benefits.

“The redemption of those bonds can only occur out of current income,” explained Senate Budget Committee chairman Kent Conrad last year. “The general fund has been borrowing from Social Security and we've borrowed well over $2 trillion,” he said. “That money has got to be paid back. How's it going to be paid back? It's going to be paid back by the other general expenditures of the federal government having to be reduced to make way for the payments that we're going to have to make on those bonds.”

The trustees said that to keep the Social Security trust funds solvent over the next 75 years, Congress could take a number of steps:

• increase the payroll tax rate from its current level of 12.4 percent to 15.01 percent;
• reduce benefits by 16.2 percent;
• find alternative sources of revenue;
• adopt some combination of these approaches.

Separately, the trustees, who are also the trustees of the Medicare program, reported that the Medicare fund that pays hospital costs for older and disabled Americans will be exhausted by 2024, the same forecast as they made last year.

After the assets of the Medicare fund are gone, if Congress were to take no action, projected Medicare revenue would be adequate to cover 87 percent of the estimated spending in 2024 and about two-thirds of projected costs in 2050.

The trustees’ report underscored the need for Congress to either change the funding of Medicare or curb the increasing cost of the benefits being paid out, or address both funding and benefits.

Reaction to the trustees’ reports varied widely along the ideological spectrum.

Jason Fichtner, a senior research fellow at the free-market oriented Mercatus Center at George Mason University, said the report showed that Social Security will be facing an increasing mismatch between taxes being paid in and benefits being paid out.

“The longer we wait, the higher the tax rate is going to have to be to make up the difference… This is a big shortfall and it's just going to get larger with each passing year if we don’t do something to reform Social Security,” he said.

House Democratic leader Nancy Pelosi said, “Despite the repeated efforts of Republicans to privatize Social Security and end the Medicare guarantee, these vital initiatives remain strong.  Today’s Trustees’ report affirms that Social Security and Medicare will continue to provide critical benefits to seniors and other Americans.”

AFL-CIO President Richard L. Trumka said in a statement that the report “confirms that Social Security remains a vibrant, strong, and durable program….The Social Security surplus is large and growing. Despite lower than expected wage and economic growth and unexpected increases in the cost of living, Social Security will be able to pay full scheduled benefits at least until 2033 absent congressional action.”

He pledged that the labor union confederation “will oppose any Social Security benefit cuts, such as a reduction of COLAs (cost of living adjustments) or an increase in the retirement age, no matter who proposes them.”

But Maya MacGuineas, president of the Committee for a Responsible Budget, saw the trustees report as “a good reminder of what we've known for decades now -- that the Social Security program is on a troubling path and must be reformed. Time is not on our side, and the longer we wait the harder it is going to be to fix this program."

The Congressional Budget Office released a report Tuesday assessing the effects of making workers wait longer before they collect Medicare and Social Security benefits -- an idea that has been gaining increasing currency in Washington as a way to curb the growth in federal spending.

The House voted last year, 235 to 193, to increase the eligibility age for Medicare by two months per year, starting in 2022, until it reached 67 in 2033. The idea was part of the House Republicans’ fiscal year 2012 budget plan.

The Senate voted, 57 to 40, against moving ahead to debate the plan, essentially killing it, but President Obama reportedly accepted the concept of raising the Medicare eligibility age during last summer's negotiations with House Speaker John Boehner.

The Bowles-Simpson fiscal commission recommended increasing the eligibility age for Social Security retirement benefits to age 69 in its December 2010 report. Republican presidential front-runner Mitt Romney has called for increasing the Social Security eligibility age, but not for anyone who is now close to retirement.

Why make workers wait before collecting benefits? The CBO’s answer: “Life expectancy has increased and disability rates among older people have declined, and raising the ages of eligibility would reduce federal outlays and, because people would have more incentive to remain in the workforce longer, (would) increase revenues.” This would help forestall a national debt crisis, the CBO said.

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The CBO report found that raising eligibility age would reduce federal spending, but maybe not by as much as some fiscal hawks would hope.

The familiar balloon metaphor applies here: squeezing costs in one part of the health care system would lead to a bulge of increased costs elsewhere.

Some of the savings achieved by pushing up the Medicare eligibility age would be offset by more spending on Medicaid, the health care program for the poor.

The CBO figures that net federal savings from raising Medicare’s eligibility age to 67 would be $113 billion over the next decade.

How big a number is that $113 billion, compared to future deficits? Under CBO’s alternative fiscal scenario, which assumes that Congress won’t increase income tax rates to 2000 levels and will postpone certain cuts in Medicare payments to doctors, the cumulative ten-year deficits would amount to $8.5 trillion.

So $133 billion is only about 1.5 percent that cumulative shortfall.

It’s worth noting that the CBO analysis assumes that the 2010 health care law remains in effect and that some of the people not able to get Medicare benefits would be covered and subsidized under the new health insurance exchanges.

But if “Obamacare” were repealed or struck down by the Supreme Court and Congress raised Medicare eligibility age, then, the CBO report said, “many more people would become uninsured.”

Boston University health care economist and statistician Austin Frakt said on his blog The Incidental Economist that increasing the Medicare eligibility age would have negative effects: for one, it would lead employers to spend an additional $4.5 billion to cover those who would otherwise be on Medicare. He also said premiums in the health insurance exchanges and for Medicare “would go up because the average age of both groups would be higher causing the risk pool of both to be less healthy.”

Jason Fichtner, an economist at the Mercatus Center at George Mason University, said raising the Medicare eligibility age “is only going to be a part of a strategy” of controlling entitlement spending and is secondary in importance to controlling the actual outlays on medical care.

As for Social Security, CBO considered a scenario in which Congress nudged up by a few months the age at which people born in 1950 or after could collect full retirement benefits and gradually raised the full Social Security retirement age to 70 for workers born in 1973 or later. Doing this would reduce Social Security outlays by 4 percent by 2035 and by 13 percent by 2060. The CBO estimates that the size of the labor force and the national income in 2035 would be about 2 percent larger than under current law, as older people remained in the work force.

But the CBO said the increase in the retirement age “would be particularly burdensome for people with low income, who tend to rely heavily on Social Security benefits, and especially for those who could neither qualify for DI (disability insurance) nor adjust their work patterns.”

But Fichtner said providing an incentive for more people to remain in the labor force “is a good thing. From the employer’s standpoint, if they’ve got pay two more years of health care benefits and salary, but they’re getting a productive employee, that’s a good thing.”

Senate Democrats are pressing ahead on President Barack Obama's plan to cut in half every worker's payroll taxes next year — paid for by a 3.25 percent tax surcharge on the very wealthy.

The $248 billion plan would trim Social Security payroll taxes from 6.2 percent to 3.1 percent in hopes of propping up the still-weak economy. It also would cut in half the 6.2 percent tax paid by employers on the first $5 million of their payroll.

A spokesman for Senate Majority Leader Harry Reid, D-Nev., says Democrats will hold a test vote on the plan later this week.

A 2 percent payroll tax holiday enacted a year ago expires on Dec. 31 and it tops the agenda in the waning days of this congressional term.

Republicans are likely to oppose the plan because it would post a permanent surcharge on income exceeding $1 million.

Reid's move is the latest political salvo by Democrats as the two parties spar over the best way to create more jobs. Monday's move appears aimed at drawing a distinction between Democrats and Republicans on taxes, with Reid seeking to maneuver Republicans into opposing the payroll tax cut.

Indeed, the payroll tax cut is unpopular with many Republicans who say the existing 2 percent cut hasn't done much to create jobs.

"The payroll tax holiday has not stimulated job creation. We don't think that is a good way to do it," said Sen. Jon Kyl, R-Ariz., in a Sunday television interview.

But many economists say that allowing the tax cut to expire is likely to do at least some damage to the economy.

"I can't believe that at a time when working families in this country are struggling paycheck to paycheck, when we need them to have the resources to buy things in our economy, to create wealth and profitability and more jobs, that the Republican position is, they'll raise the payroll tax on working families?" said Sen. Dick Durbin, D-Ill. "I think that just defies logic."

Republican leaders have signaled a willingness to work with Democrats on both the payroll tax cut and a further extension of jobless benefits for people who have been unemployed for six months or more. But the proposals are so expensive that it's unlikely that lawmakers will find a way to fully pay for them.

Instead, after spending most of the fall waiting for the deficit "supercommittee" to devise a plan to cut the deficit by $1.2 trillion or more, it seems that lawmakers are actually on track to increase the deficit as the congressional session comes to a close.

Kyl and Durbin spoke on "Fox News Sunday."

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