Source: Social Security Administration.
There has been all kinds of speculation about the future of Social Security, ranging from minor changes to a complete overhaul of the current system. We asked three of our analysts where they feel Social Security is heading, and here is what they had to say.
Cheryl Swanson
The largest drop in worker-to-beneficiary ratios in history is right around the corner as baby boomers begin to retire. When Social Security was first established, the ratio was 15-to-one; today, it's closer to three-to-one. It's only getting worse as the population ages and the birth rate declines.
If your retirement is within 10 years, you don't have much to worry about. It's the 25- to 40-year-olds who might face a serious reduction in benefits. In particular, the burden is likely to fall most heavily on the higher earners.
That group already gets back less -- relative to what they've paid in -- than low-income workers. Between that and the Social Security Administration's rising retirement age, the National Academy of Social Insurance calculated that recent proposals from Capitol Hill would lead a high earner born in 1975 to receive 30% less in benefits than one born in 1945. The proposals are the work of the bipartisan National Commission on Fiscal Responsibility and Reform, established in 2010.
Members of generation X are likely to live longer than their parents, yet a major source of their retirement income is likely to be smaller -- which is just one more reason, my young friends, to get your financial houses in order.
Dan Dzombak
The current Trustees Report of the Social Security Administration projects that the Social Security Trust Funds will be depleted by 2034. While I fully expect Congress to wait until the last possible moment to take up the issue, Social Security will be there for Americans 30 years down the road -- but with some changes. First, a little history.
When Social Security became law under President Roosevelt in 1935, it was envisioned as a way to provide for Americans who lived past the average life expectancy. At the time, that age was roughly 65. This is one of the reasons why the age at which you can take Social Security without penalty is around that age.
Since then, the average life expectancy of Americans has jumped to 79, and yet the age at which you can take Social Security has hardly budged -- for most Americans, the threshold is now age 66. To fix Social Security, I expect Congress will update the Social Security formula so that you can take it without penalty at an age closer to the life expectancy of the time. Changing the date at which you can begin to take Social Security penalty-free would mean Social Security is still able to pay out funds for those who reach "old age."
Who knows, though, what our average life expectancy will be by that time. With new healthcare technologies rapidly advancing, it could be a whole lot higher than 79.
Dan Caplinger
Many people believe that Social Security will be completely transformed within 30 years, with the latest Social Security Trustees Report saying that the Trust Fund that covers retirement benefits will be completely exhausted within the next 20 years. Without any action, Social Security will only be able to afford about three-quarters of its current benefit levels. Moreover, many younger Americans firmly believe that Social Security won't be there for them at all.
Yet there are many different ways that lawmakers could improve Social Security's financial condition. Measures like increasing payroll taxes slightly, or raising the wage base on which the government collects Social Security taxes, could go a long way toward shoring up Social Security for decades to come. Already, current law provides for the full retirement age to rise gradually to age 67, and further increases could be made gradually to affect those in future generations, reflecting the rise in life expectancy.
This isn't the first time Social Security has been under financial threat, and past solutions proved not to be as extreme as the worst-case scenarios that many people had in mind back then. All in all, given the reluctance of policymakers to make major changes to the program, Social Security is likely to look very similar to its current form even 30 years down the road.
