The good news: Social Security really will work for your grandkids. Now, the bad news

Not so fast.
Not so fast.
Image: Reuters/Phil Noble
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The US Social Security program turned 80 years old last week. But despite its longevity, a recent Gallup poll shows that more than 50% of Americans don’t think they’ll get any benefits when they retire.

It’s pretty stunning that the majority of American’s seriously question the future of Social Security, one of the oldest and most successful government programs. The good news is they are wrong; they will get something from Social Security. The question is how much.

You can’t overstate how important Social Security is. It accounts, on average, for nearly 60% of retiree’s income. And those incomes are fairly modest. The average couple benefit is only $24,000. As more Americans retire with paltry savings, Social Security will be all that keeps them out of poverty.

While some minimize the extent of the problem, Social Security is in trouble. Starting in 2034, the tax revenue taken each year will be smaller than benefits that need to be paid out. Doing nothing would mean a 16% cut in benefits in 2034 or a 24% cut to ensure no future cuts (assuming no tax increases).

Something has to be done. And the sooner it happens the cheaper fixing Social Security will be. Plus, the program’s shaky finances are leading to serious doubt around its sustainability and making it difficult for people to accurately plan for retirement. But while we don’t know what will happen exactly, certain scenarios are likely:

  1. American’s close to retirement will probably get what they’ve been promised. Almost no reform plan explicitly cuts benefits for people older than 55.
  2. At the very least, younger Americans can expect 75% of their promised benefits, but even that is an extreme case. It assumes nothing is done until 2034 and all the burden falls entirely on benefit cuts instead of tax increases, which probably won’t happen.
  3. A more likely outcome is some combination of tax increases and benefit cuts. Benefit cuts will probably be bigger for higher earners because lower-income Americans are more dependent on Social Security in retirement. So if you are lower middle-class or poorer, odds are you’ll get what you are promised.
  4. You can also expect a stealth benefit cut. Cutting benefits by 10% is too obvious and no politician wants to be accused of throwing grandma off a cliff. But changing the benefits accrual rate or how much benefits increase with inflation won’t set off the same alarms. It means less money in your pocket but you probably won’t notice how much exactly is missing.
  5. There will probably be higher taxes. As long as there’s been Social Security, there’s been tax increases. When the program was first set up, associated taxes were never intended to be more than 2% of payroll. Now that they are larger than 12%, there’s less room to increase them further. That means higher earners will probably pay more.
  6. You’ll probably work longer. Increasing the retirement age seems like the most sensible way to cut benefits. The retirement age hasn’t changed since the 1930s but life expectancy has increased for all Americans. But because richer Americans live even longer, increasing the retirement age has been painted as a regressive benefit cut. That is, lower income people, who also have more physically demanding jobs, are left with relatively short retirements. However, there are stealth ways to get people to work longer. There are already significant incentives to delay claiming Social Security (waiting until 70 increases your retirement income by 40%). Even if an explicit retirement age increase isn’t possible, more financial incentives to delay retirement are possible. Paired with benefit cuts and low savings, many Americans might not have a choice.