Few options remain to repair Social Security system
SAN FRANCISCO — Social Security provides a majority of the retirement income for about two-thirds of Americans older than 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 benefit cuts, tax increases or a bit of both.
The program’s annual costs will exceed revenues in 2016. That shortfall then will be covered by the system’s trust fund through 2037 — four years earlier than expected a year ago. At that point, payroll-tax revenues will cover about 75 percent of benefit payouts through 2083.
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.
“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.
“The chance that people won’t receive their full promised benefits is actually quite high,” 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. “How big those benefit cuts will be and who they might affect is an open question.”
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.)
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.
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 increase 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 co-authored by Alicia Munnell, director of Boston College’s Center for Retirement Research.
While there’s a “hold harmless” law that prevents most beneficiaries’ Social Security checks from actually decreasing as a result of steeper Medicare premiums, those health costs still eat up a portion of the Social Security cost-of-living increase.
And next year, because of rising Medicare costs, some Social Security beneficiaries might actually 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.
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.
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 receive higher benefits as a result.
Another idea: Raise the retirement age again. That, too, has its complications.
“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,” Munnell said.
So will teenagers today receive benefits decades from nowâ¢ Most policy experts agree the answer is yes.
“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,” said Dallas Salisbury, president of the Employee Benefit Research Institute, a Washington-based nonprofit group.