Will Social Security Be There? Yes and No

Social Security is sure to change, and there’s no shortage of speculation about whether or not Social Security will be around for future generations. However, most people don’t understand the sneaky, subtle ways in which the system can be changed. Americans tend to talk about Social Security in terms of when it will run out of money (pick a year), but that’s not likely to happen. There are plenty of ways to ensure that Social Security will continue to exist, without making obvious and dramatic cuts to your benefits.

If you’re counting on Social Security in its current form (or if you think it will be nonexistent) you might want to reconsider – the world is a complicated place, and complicated is what we should expect. In fact, small, difficult-to-understand changes are the most appealing type of changes in politicians’ eyes. Given that, Social Security will probably be around forever, but it won’t be the same program for future generations.

Inflation Adjustments

Probably some of the least noticed changes will have to do with inflation adjustments. Every once in a while lawmakers have to update numbers because things change with inflation. This is a great opportunity to make changes that seem insignificant to taxpayers, but which make a big dent in the Social Security problem. For example, in 2013 you pay Social Security taxes on the first $113,700 of your income. If you earn more than that, you get to keep the 6.2% you were paying on any income in excess (don’t forget that your employer matches those payments to Social Security).

Will Social Security be there in 2099. Yes and no...That dollar amount is supposed to change as income levels rise, but what if it doesn’t change at the same speed? We would reasonably expect Congress to raise the level at a rate equal to the rate of income inflation, but raising it faster means that taxpayers will pay more (relatively) than we have been paying in the past. That would slow down the depletion of funds, and Social Security will be with us a little bit longer. Combine this strategy with a few other strategies, and Social Security might be around forever.

You can do the same with benefit increases. Except you wouldn’t increase benefits faster than inflation, you’d slow down any increases. This approach is trickier because retirees have already stopped working and they’ll have a harder time adjusting to a paycheck that doesn’t keep pace with inflation (as opposed to workers, who can reluctantly pay taxes that increase faster than inflation). A twist on this is to change how you define inflation, and that’s already been proposed.

Fancy Calculations

Another neat trick that might keep Social Security alive would be to change the way benefits are calculated. Why not increase the number of years’ of income that go into the calculation? After all, we’re all working more years, so maybe the old system needs to be updated. Currently, the Social Security calculation considers your highest 35 years of earnings. But adding just a few years would mean that most people get less from Social Security. That’s because you probably earn the most at the end of your working years, while you were just getting on your feet earlier in life. Bringing in income from your youth will bring down your average lifetime earnings (that’s not exactly how it works, but close enough). If you didn’t work for every year in the calculation – if you worked for less than 35 years – you get zeroes in the calculation until they fill up all the years, which doesn’t help your average.

Taxing Benefits

If you try to figure out what you will get from Social Security, you probably look to your Social Security benefit statements. Those statements (which used to arrive in the mail each year around your birthday but are now available online) give an estimate of what you’ll receive based on your earnings history. The thing is, you probably think that you’ll get to spend all of that money, but that’s not necessarily the case. You may have to pay taxes on some portion of your Social Security benefits.

Is this a reduction of your benefits? Technically no, but it might feel that way when you look at how much you’ll have to spend each month. Don’t be surprised to see more and more people paying tax on their benefits. You can debate whether the intent of the law is right or wrong – benefits are only taxable above certain income levels – but the fact is that most people aren’t aware of this practice until their benefits are taxed.

The Obvious Stuff

Of course, there are a few changes that we can all see coming, and which won’t go unnoticed. Raising the retirement age is one example. Making people wait a few extra years before taking benefits means delaying payments (and paying people for fewer years, since they’ll be a few years closer to death). Another “brute force” option is simply paying people less. You might think you know how much you’ll get in retirement, but there is no guarantee or promise that you’ll get that amount. And of course there’s talk about means testing, which just means that the more you have, the less you’ll get.

These simple changes are what people fear most, and they might make a large difference in the health of Social Security, but they can be minimized (along with political damage to the people who end up making changes) if the system changes in other, less-obvious ways.

Other, More Complicated Changes

The examples above are just a few of the many ways that laws might change to keep Social Security afloat. But there are others. Many of them are complicated and esoteric, and I can’t claim to have much understanding of them. The point is to know that it’s not as simple as saying Social Security will be there in the future or it won’t. There are a lot of moving parts, and a few tweaks here and there can keep it alive. It just won’t be as rich as it used to be.