According to the Social Security Administration, today's retirees receive an average of $1,229 per month in Social Security benefits, representing almost 40 percent of the income of the elderly. Among the oldest beneficiaries, almost a quarter of married couples, and almost half of unmarried individuals, rely on Social Security for at least 90 percent of their income.
But that's today. What about tomorrow? Many 20-somethings never expect to collect any Social Security when they retire. Even middle-age workers doubt they will get their fair share of benefits. Social Security expert Lawrence Kotlikoff, an economics professor at Boston University, warns: "People 50 and below should change their planning now to incorporate a benefit cut."
According to the Social Security Board of Trustees, the system is already running a deficit, paying out more in benefits than it's taking in from the payroll tax. And because the number of beneficiaries will grow at "a substantially faster rate than the number of covered workers," the trust fund is expected to be exhausted by 2036.
Throughout my career, watching a sizable deduction come out of my paycheck every two weeks, I trusted that Social Security would be there when I retired. I did not assume Social Security would cover all my expenses, but I did believe it would provide a base income if things went wrong or a nice supplement to my retirement income if things went well.
Now people are becoming more skeptical of Social Security. Many baby boomers are grabbing payments as soon as they can, simply because they want to get back part of their investment before the whole thing goes down. Nearly 70 percent of eligible Social Security beneficiaries begin payments before they reach full retirement age—even though if you start at age 62, you receive approximately 25 percent less per month. A real life example: A man projected to receive $1,938 per month at the full retirement age of 66 would instead get only $1,460 if he started benefits at age 62.
So does it make any sense to start payments early? The Center for Retirement Research at Boston College released a report in May 2012 demonstrating how most people would benefit by delaying Social Security. Author Steven Sass argues that Social Security acts like an annuity. Social Security is inflation protected, fairly priced, and reasonably safe because it is run by the government. Furthermore, buying this annuity from the government is "especially attractive when interest rates are low as they are today" because the additional income you get by claiming benefits later is not discounted by the current low interest rates.
This situation may be true today. But others point out the political risk of waiting, since Social Security policies may soon change in order to keep the system afloat. The retirement age has already been increased to 66, and to 67 for those born after 1959. Republicans have suggested raising the retirement age further, to 70 for people currently 20 years or more away from retirement.
There are proposals to increase taxes on beneficiaries, means-test beneficiaries, and reduce initial payments for future retirees. There are also sneakier ways to cut benefits. For example, Congress is talking about implementing a new way for Social Security to adjust benefits for inflation, resulting in—you guessed it—smaller increases in benefits.
The good news is that lawmakers are likely to make the adjustments necessary to keep Social Security afloat for future retirees. The bad news is that some experts want to chip away at payouts, especially for people under 50. Politicians will do it quietly, hoping retirees won't notice too much. And they will push off more dramatic cuts to future beneficiaries, partly because older people are politically powerful, while younger people don't vote as much.
Nobody knows for sure how Social Security payouts will change. But the most likely scenario is that Social Security will be with us for a while, perhaps even for 20-somethings. But over time, benefits will slowly lose ground. Some financial planners assume that clients currently in their 30s and 40s will receive somewhere between 50 to 80 percent of what is now considered full benefits.
Social Security will likely be there for us in the future. It's just that, for younger people, it could prove a more bare-bones base income if things go wrong, or a somewhat-less-significant supplement to retirement income if things go well.
Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement, and other concerns of baby boomers who realize that somehow they have grown up.