Nine years ago a survey made a startling revelation: more 18 to 34 year olds believed in flying saucers than Social Security.

Well, I've got some good news and some bad news for survey participants.

The good news: Social Security will exist. It will continue to pay benefits. It will be there for workers who are 30 today. Expect this to be proudly proclaimed by members of both parties in every election between now and 2030.

The bad news: Today's thirty some-things will have to deal with the extreme weasel-ness of the political process. The Social Security benefits young workers receive will be smaller than the benefits received by current retirees. Basically, Social Security is a flying saucer with a shrinking gas tank.

We're not facing radical events, economist Alicia Munnell says. It's just the inevitable result of existing law. In a recent article published by the Center for Retirement Research at Boston College, Dr. Munnell identifies three factors that will reduce the role of Social Security for young workers. All three are current law. This is a done deal.

The factors?

The rising retirement age for full retirement benefits. The age for collecting full retirement benefits started to increase in 2000. The traditional 65 years will slowly rise to 67 by 2022. This may seem minor. It isn't. It amounts to a benefits cut for anyone who retires earlier than the new "full" retirement age. Currently, about 40 percent of all workers retire by age 62; 70 percent retire by age 65.

I doubt if anyone needs to be reminded that we're now in the third decade of involuntary retirements from corporate downsizing. For many workers, this amounts to a forced benefit cut.

How big will it be?

Significant. According to figures cited in Dr. Munnell's article, even low wage earners will see benefits decline. From replacing 55.5 percent of earned income in 2000, benefits will sink to 49.1 percent in 2030. A maximum earner will see the replacement rate fall from 27.3 percent to 24.0 percent.

The rapid growth of Medicare Part B insurance premiums. At age 65 retirees are eligible for Medicare health insurance. The premium for Medicare Part B, the insurance that covers doctor bills and other services, is automatically deducted from retirement benefits. Over the last ten years, Part B premiums rose at a slower rate than retirement benefits.

In the future, the monthly insurance premium is expected to rise faster than the monthly retirement benefit. A person who retired at 65 in 2000 paid about 6 percent of their retirement benefits for the insurance premium. In 2020, when the same person is 85, the insurance premium will take 10.6 percent of retirement benefits. A person retiring in 2030 can expect Medicare premiums to absorb 9.1 percent of their benefits at age 65--- but 13.6 percent twenty years later.

The taxation of benefits. Today, about 20 percent of retirees pay income taxes on their Social Security benefits. The income thresholds for taxing the benefits, however, aren't indexed. As a consequence, even middle-income workers are likely to pay taxes on future benefits.

"A 15 percent personal income tax on half of the benefits will reduce replacement rates by another 7.5 percent compared to today," Dr. Munnell observes.

By her calculation, these three factors will take the Social Security income replacement rate from the current 41.2 percent to 30.5 percent for a medium income worker retiring at 65 in 2030. That's a loss of 26.5 percent.

Already written into law.

Sadly, the reductions probably won't stop there. Examining Social Security's 75 year financing shortfall and making the assumption that retirees pay half the cost of putting the system in balance, Dr. Munnell estimates an additional 10 percent benefit cut in the future. That would take the replacement rate for a medium income worker down to 26.9 percent, a 35 percent reduction from current benefits.

Social Security: As Certain As A Flying Saucer--- But It Won't Go As Far
Figures show estimated Social Security benefits as a percent of pre-retirement earned income for a medium income worker.
Development Replacement Rate in 2030
Age 65 Age 62
Unadjusted for retirement age change 41.2% 33.0%
After retirement age change 36.5 29.2
After Medicare Part B Premium 33.2 25.9*
After Personal Income Tax 30.5 23.7
After 10 Percent Benefit Cut to Eliminate Financing Gap 26.9 20.8
Source: Alicia Munnell, Center for Retirement Research, Boston College *Medicare does start until age 65


Our friends in Washington pledge every year to "save" Social Security. What they never say is that today's benefits are "saved" by cutting tomorrows.

Related URLs:

Don't get caught in early retirement tax trap

Tax torpedo can cause a sinking feeling

Alicia Munnell, The Declining Role of Social Security

Third Millennium

The 1994 Social Security and Flying Saucers Survey