The Future Of Social Security
“Social Security is one of the greatest achievements
of the American government, and one of the deepest
commitments to the American people. For more than
six decades it has protected our elderly against
poverty and assured young people of a more secure
future. It must continue to do this important work
for decades to come.”
President George W. Bush
“Whatever their individual circumstances, the vast
majority of Americans will at some point in their
lives be touched by Social Security. For the
millions of Americans currently receiving benefits,
and for those who will become eligible in the
future, we must make sure that the program is there
for them.”
Jo Anne B. Barnhart Commissioner of Social Security
Social Security must change to meet future
challenges
Social Security has been a basic part of American
life for over 70 years. It provides a base of
economic security in today’s society through a
valuable package of retirement, disability and
survivors insurance.
About 162 million workers are earning Social
Security protection, and about 49 million people
receive retirement, survivors and disability
benefits from Social Security.
The Social Security system is designed so that there
is a link between how much workers and their
employers pay into the system over their working
years and how much they will get in benefits.
Basically, high-wage earners receive a higher
benefit payment than low-wage earners. However, the
benefit “formula” is set up so that lower wage
earners will get a higher percentage of their
pre-retirement earnings.
Social Security has been changed over time to meet
the needs of the American people. It will need to
change again to meet future challenges.
Strengthening Social Security to meet changing needs
is important to you ... to your parents and
grandparents ... to your children and grandchildren.
In the upcoming national debate on Social Security
reform, it is important that you understand the
issues presented in this booklet about the system’s
long-range future.
Social Security has made an enormous
difference in the lives of older Americans
Social Security provides older Americans with a
dependable monthly income with automatic increases
tied to increases in the cost of living.
Workers can retire as early as age 62 and get
reduced Social Security benefits. Or they can wait
until full retirement age and receive full benefits.
The full retirement age is increasing gradually. It
will reach 67 for people born after 1959.
More than 9-in-10 retirees now get Social Security
benefit payments each month. For two-thirds of the
elderly, Social Security is their major source of
income. For a third of the elderly, Social Security
is virtually their only income.
Social Security is more than a retirement
program
Social Security also is “ America’s Family
Protection Plan.” Younger workers and their families
receive valuable disability and survivors insurance
protection. In fact, about 1-in-3 Social Security
beneficiaries is not a retiree.
More than eight million workers and family members
get disability benefits, and about seven million
people get monthly survivors benefits. These
benefits can make a significant difference. For
example, a 35-year-old worker with expected lifetime
average earnings of $40,000 a year and who has a
spouse and children could get about $1,800 a month
from Social Security if he or she became disabled.
If that same worker were to die, his or her family
could receive about $2,400 a month from Social
Security in survivors benefits.
Social Security provides a foundation on
which to build retirement security
A comfortable retirement rests on a three-legged
financial stool—Social Security, pensions and
savings.
Today, about half of all workers are covered under
an employer-sponsored pension, and many people are
not saving as much as they should. While Social
Security replaces about 40 percent of the average
worker’s pre-retirement earnings, most financial
advisors say that you will need 70 percent or more
of pre-retirement earnings to live comfortably. Even
with a pension, you will still need to save. If you
will not have a private pension, you will need to
save more—and start saving sooner.
Each year, a Social Security Statement is mailed to
workers age 25 and older. This Statement shows your
earnings history and also gives estimates of your
retirement, survivors and disability benefits
provided by Social Security. You should use this
Statement to help you with your future financial
planning.
Changing demographics are driving need for
changes in Social Security
The main reason for Social Security’s long-range
financing problem is demographics. We are living
longer and healthier lives than ever before. When
the Social Security program was created in 1935, a
65-year-old American had an average life expectancy
of 12 1/2 more years; today, it is 17 1/2 years and
rising.
In addition, 78 million “baby boomers” will begin
retiring in 2008, and in about 30 years, there will
be twice as many older Americans as there are today.
At the same time, the number of workers paying into
Social Security per beneficiary will drop from 3.3
today to about 2.1 in 2032.
These demographic changes will severely strain
Social Security financing.
Current Social Security system is
unsustainable in the long run
Many people think that the Social Security taxes
they pay are held in interest-bearing accounts
earmarked for their own future retirement needs. The
fact is that Social Security is a pay-as-you-go
retirement system—the Social Security taxes paid by
today’s workers and their employers are used to pay
the benefits for today’s retirees and other
beneficiaries.
Social Security is now taking in more money than it
pays out in benefits, and the remaining money goes
to the program’s trust funds. There are now large
“reserves” in the trust funds, but even this money
is small compared to future scheduled benefit
payments. In 2017 benefits owed will be more than
taxes collected, and Social Security will need to
begin tapping the trust funds to pay benefits. The
trust funds will be exhausted in 2040. At that time,
Social Security will not be able to meet all of its
benefit obligations if no changes are made.
Choices lie ahead
There are several ways to guarantee that
Social Security continues to be there for future
generations. Each option means difficult trade-offs
that Americans need to know about. The sooner the
changes are made, the smaller their impact will be.
For example, some people think that benefits should
be reduced, or at least their future growth should
be slowed. One way of doing this would be to
increase the retirement age for full Social Security
benefits. They say that Americans are living longer
and healthier lives than ever before and that people
are spending an increasing number of years in
retirement. Critics of the proposal to further raise
the retirement age say most Americans now choose to
retire early, and that it would be hard for some
people to work past the current retirement age
because of their health or because their jobs are
just too demanding.
Some people believe that Social Security taxes
should be raised so that all future benefits could
be paid. They want to increase the current combined
payroll tax rate, which is now 12.4 percent. Critics
argue that payroll taxes are already very high,
having been raised 20 times since the program began,
and that many more workers already pay more in
payroll taxes than they do in income taxes. And they
point out that eventually Social Security taxes
would have to be raised by about 50 percent to pay
for all benefits owed.
Other people believe that the future financing
problem can be solved without reducing benefits or
raising taxes. They favor “pre-funding” benefits for
younger workers by letting them have their own
voluntary Social Security personal savings account.
They say that by investing in stocks and bonds,
workers could receive higher benefits. Supporters
also say personal accounts would allow workers to
leave a “nest egg” to their heirs.
Critics say that personal retirement accounts mean
higher risks for workers, and that if investments
were not doing well when a worker is ready to
retire, plans would have to be changed. They also
say personal accounts could be expensive to
administer.
Some people think the government and not individuals
should invest Social Security reserves in stocks and
bonds, so that higher potential returns can be
earned but financial risks shared. But critics say
the government should not invest in private
companies, because the government could end up being
the largest stockholder in a company.
There are other options and suggestions being
discussed that could strengthen the Social Security
retirement system. While there is disagreement over
what should be done, the 2006 Annual Report of the
Board of Trustees notes that “projected trust fund
deficits should be addressed in a timely way to
allow for a gradual phasing in of the necessary
changes and to provide advance notice to workers.
The sooner adjustments are made the smaller and less
abrupt they will have to be."Questions? Send us an e-mail. |
