Social Security provides a majority of the retirement income for about two-thirds of Americans over age 65, but if you’re in your mid-50s or younger, it’s time to make alternate arrangements.
The program’s dismal outlook has long been known, but the recent economic crisis further scarred the program’s finances, bringing closer the day of reckoning when receipts no longer cover benefit payouts.
That’s bad news for anyone in their mid-50s or younger, because proposals that aim to put the system on sound financial footing almost invariably protect current beneficiaries and people near retirement age, but everyone else can expect either benefit cuts or tax hikes or possibly a bit of both.
Currently, the program’s annual costs will exceed revenues in 2016. Then, that shortfall is covered by the system’s trust fund through 2037 — four years earlier than expected a year ago. (One reason: lower payroll-tax revenue thanks to the steeply higher unemployment rate.) At that point, payroll-tax revenues still cover about 75 percent of benefit payouts through 2083. So, keep in mind, even if nothing is done, it’s not as though benefits are eliminated, even over the next few decades.
Of course, some people might respond: What trust fund? It’s essentially an accounting placeholder — a note detailing what the government owes itself. There’s no cash pile waiting to be paid out to needy retirees
Some people have said that, given the weight of its other financial obligations, the federal government will be forced to renege on its Social Security obligations. But experts, both liberal and conservative, say that scenario is highly unlikely.
“Some people say the government will default on the trust fund and won’t pay. That won’t happen,” said Andrew Biggs, a resident scholar at the Washington-based American Enterprise Institute and a former deputy commissioner for policy at the Social Security Administration.
“If they don’t want to repay it, (the government can) simply cut Social Security benefits, raise the retirement age, raise taxes … it’s all under the control of the government basically,” he said. Still, he said, “it may not be paid back on time in the sense that we’ll pay promised benefits through 2037 — my sense is we’ll cut benefits way before the trust fund runs out.”
Others said the government’s promise to Social Security recipients is likelier than other vows to be kept.
“The problem is really the government as a whole is in a deficit position. That doesn’t mean they won’t meet that particular commitment but the question of how we’re going to meet all of our commitments fiscally is kind of up in the air,” said Eric Toder, an institute fellow at the Urban Institute in Washington. “I don’t think that’s one they’re likely to default on.”
Still, people paying into the system now are highly likely to get less than is being promised currently. See story on U.S. retirement system in peril.
“The chance that people won’t receive their full promised benefits is actually quite high,” Biggs said. “How big those benefit cuts will be and who they might affect is an open question.” Still, “most of the reforms out there wouldn’t touch people who are 55 and over and they also wouldn’t affect low-income people.”
Some say benefit cuts are less likely than raising payroll taxes to bridge the system’s shortfall.
Given the recent hit to people’s retirement plans, there’s “increasing recognition how important Social Security is, and how it serves as a backbone for most people’s retirement income,” said Alicia Munnell, director of Boston College’s Center for Retirement Research. “I’d be surprised if there was any major cutting in the proposals to fix the system.” See story on quick ways to rebuild your portfolio.
Already, some beneficiaries get less than they were originally promised.
For one, the “normal” retirement age — when you’re eligible for full benefits rather than the reduced payout for early retirees — is inching higher, thanks to a 1983 law aimed at dealing with the looming funding shortfall. Workers born before 1938 collect full benefits at age 65; for people born later, the age for full benefits is slowly being raised to age 67. (For anyone born in 1960 or later, the full retirement age is 67.)
Over a lifetime, that means lower benefits, but given our longer life spans, it’s hard to argue with that change. When Social Security began in 1935, the average American’s life expectancy was about 60. Now it’s 77.7, according to the Centers for Disease Control.
Then there’s Medicare, the rising costs of which are taking a bigger bite of overall payments. Medicare and Medicaid combined will total almost 10 percent of GDP in 2040, up from 4.2 percent in 2008, while Social Security’s share will rise to 6.2 percent, up from 4.3 percent now, according to the Government Accountability Office, the investigative arm of Congress. Medicare’s funds are expected to be exhausted in 2017, two years earlier than expected last year.
And Medicare beneficiaries take some of the hit of those rising costs in their Social Security checks. Generally, Medicare Part B premiums (for doctors’ services) are deducted from Social Security checks. Since 2000, the average annual hike for the Part B premium has been 9.8 percent, versus the average 2.7 percent for Social Security’s annual cost-of-living increase, according to a report Munnell co-authored in October.
While there’s a “hold harmless” law that prevents most beneficiaries’ Social Security checks from actually decreasing due to steeper Medicare premiums, those health costs still eat up a portion of the Social Security cost-of-living increase.
“The increase in Medicare premiums offsets some of the cost-of-living adjustment on the net benefit,” Munnell said. Assume a monthly benefit of $1,000 and a premium of $100, for a total check of $900. Social Security COLA increases alone would bring the original $1,000 benefit to $1,027, but the larger Medicare premium hike slashes the amount to about $917, a 1.9 percent increase from $900, rather than the full 2.7 percent average COLA hike.
And next year, because of rising Medicare costs, some Social Security beneficiaries actually may get smaller checks. Here’s why: The current low inflation rate, based on the consumer price index, means there will be no Social Security cost-of-living adjustment in 2010 and 2011. But Medicare premiums will rise. As a result, the higher earners who are not covered under the “hold harmless” provision — about 5 percent of Medicare Part B beneficiaries who earn an adjusted gross income higher than $85,000 for singles and $170,000 for couples — will face a benefit cut.
And there’s a third way benefit cuts are marching higher: The tax on benefits. If your “combined income” (adjusted gross income plus one-half of Social Security benefits plus nontaxable interest income) exceeds $25,000 for singles and $32,000 for married couples, you pay tax on up to 85 percent of benefits.
Those income thresholds are not indexed to wages or inflation, Munnell said.
Right now about 30 percent of recipients pay tax on their benefits. That will rise to 42 percent in 2020 and 52 percent in 2030, according to Munnell’s projections.
“As the whole level of wages rises, more and more people will become subject to taxes. That’s been happening gradually over time,” she said.
All told, by 2030 the average worker who claims at age 65 will get benefits that replace just 30 percent of earnings—down from 41 percent now — thanks to the higher normal retirement age, higher Medicare premiums, and bigger pool of benefits subject to taxes, according to a Center for Retirement Research report in 2007.
Separately, some retirees volunteer for their own benefit cut: Most people take their benefits at the first opportune moment — age 62 — despite the fact that waiting for your full retirement age or beyond substantially increases your monthly benefit (of course, to enjoy a higher total benefit amount you have to live a certain number of years).
“We hear stories that people are claiming early because they’re worried that if 1/8the system is3/8 fixed they might get lower benefits,” Munnell said. “It’s like take your money and run, which is silly, because every proposal I’ve seen doesn’t change benefits for those who are 55 or older.”
Protecting the near-retirees is why young people should consider praying that Congress deals with the issue sooner rather than later.
“The problem is that the boomers have already reached 62 now and every passing month more and more people are entering the golden period” — that is, the age where any proposal to fix Social Security protects people, said Barbara Bovbjerg, director of education, workforce and income security issues at the U.S. Government Accountability Office, the investigative arm of Congress.
“As a boomer I can say this: There are 80 million of us — we should do something with Social Security that makes boomers part of the solution, not part of the problem,” she said. “Because once the boomers (retire), you have many fewer options. You want to try to get those changes made while there are still boomers in the workforce.”
A variety of solutions have been proposed. They range from “simple yet harsh” — cutting benefits across the board — to the complex, such as raising the amount of income subject to the Social Security payroll tax. That’s complex because then you must decide whether the higher-income earners hit by this change should also receive higher benefits as a result.
“If you don’t (increase their benefit), you sort of break this link between contributions and benefits, and you irritate high-income people whose support of the program is really essential,” Munnell said. But if you do tie higher benefits to higher taxes, you don’t get much money out of raising taxes, she said.
Another idea: Raise the retirement age again. That, too, has its complications.
“I’m all for people staying in the labor force longer,” Munnell said, “but if you just keep increasing the retirement age and leave early retirement benefits available at age 62 what you have is a situation where people who can’t find jobs or have some physical disability and have to claim benefits at 62 just keep getting lower and lower amounts.”
So will teenagers today receive benefits decades from now? Most policy experts agree the answer is yes.
“Social Security with 99 percent probability will be there” for future retirees, said Dallas Salisbury, president of the Employee Benefit Research Institute, a Washington-based nonprofit group.
“I plan on getting Social Security and I’m fully confident that my 11-month-old niece will get Social Security — and every member of the family in between,” he said.
Others agreed. “Even in the worst case it’s not that there’s gong to be no benefits, it’s just they’d be a good deal lower,” Toder said.
“The bigger problem for (an) 18-year-old is looking at the totality of the budget picture. That’s going to be very bad and affect everything the federal government does or can do. And there doesn’t seem to be much political ability to fix it, at least in the short run.”
If Medicare and Social Security aren’t cut back or new revenue sources found, Toder said, “there’s not going to be money for the federal government to do anything else but pay money to retirees — and that’s an impossible situation.”
(c) 2009, MarketWatch.com Inc. Source: McClatchy-Tribune Information Services.