En español | Will Social Security be there for you? The answer is yes, but the future strength of the program depends on the outcome of a debate now raging in Washington. That debate often links Social Security to the ballooning federal deficit, although the program plays no direct role in the nation's debt and currently enjoys an enormous surplus.
See also: Social Security: Fears vs. Facts.
That scenario has younger Americans wondering whether Social Security will be able to meet their needs. A 2010 AARP survey found that just 25 percent of Americans ages 30 to 49 are confident about Social Security's future — compared with 58 percent of people 65 and over.
Here's the good news: There's time to implement small changes that can put Social Security in balance for the long term. Think of Social Security as a gigantic battleship that turns slowly: The sooner we start making adjustments, the smaller the required changes.
Read on to understand the debate, the issues, and the options.
Money in …
More than 80% of Social Security's revenue comes through the FICA (the Federal Insurance Contributions Act) payroll tax, which imposes a 12.4% tax on income, with 6.2% paid by employers and 6.2% paid by workers. Two other revenue sources: interest earned on reserve funds, and income taxes paid on benefits by higher-income retirees.
FICA revenue that isn't needed immediately is credited to the Social Security Trust Fund and invested in securities issued by the U.S. Treasury to fund government operations. Those bonds are backed by the full faith and credit of the government. When Social Security redeems bonds, that puts pressure on the federal budget.
A formula averages and indexes lifetime earnings to determine benefits; the average monthly retiree benefit this year is about $1,180. For 64% of Americans 65 and over, Social Security provides more than half of their income. Total benefits this year: $727 billion.
There's a shortfall ahead… The Trust Fund is growing and is projected to peak at about $3.7 trillion in 2022. Then it heads down as boomer retirements accelerate and bonds are redeemed. Without reforms, the reserves would be exhausted in 2036. Why? Longer life spans and lower birthrates mean more beneficiaries as a percentage of the population, fewer workers are paying into the system because of high unemployment, and we haven't raised payroll taxes for the system since 1990. Social Security needs periodic adjustment to stay in actuarial balance. That's why it's required to have a 75-year outlook on its finances.
Option 2: Adjust benefits
Raise the retirement age. A gradual increase from 67 to 70 by 2040 would close 65% of the gap.
Index benefits for longevity by paying lower annual benefits as average life expectancy increases. This closes 21% of the gap and maintains similar total lifetime benefits for each generation. (But lower-income Americans, who have shorter life expectancies, would receive a bigger benefit cut.)
Change the formula for the annual cost-of-living adjustment (COLA). President Obama's deficit commission recommended using a new inflation measure called the "chained" Consumer Price Index, which tends to rise more slowly than the index now used to compute Social Security's COLA.
Option 3: Private accounts
President George W. Bush's proposal in 2005 to partially privatize Social Security by creating IRA-style retirement accounts was defeated, but a small contingent of policymakers and politicians continues to argue for partial privatization or even elimination of Social Security altogether.
Syndicated columnist Mark Miller is the author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living. He blogs at RetirementRevised.com. Twitter: @RetireRevised.