By Ryan Brown
When President Franklin D. Roosevelt signed the Social Security Act in 1935, it’s possible he didn’t understand the huge effect his social welfare plan would have. In 2014, over 59 million Americans will receive almost $863 billion in Social Security benefits. 9 out of 10 individuals over the age of 65 receive benefits and among those, half of elderly married beneficiaries rely on Social Security for 50% of their income. 47% of single, elderly beneficiaries rely on Social Security for 90% of their income. These numbers are in addition to the disabled workers and dependent family members of deceased workers who also receive benefits.
In a word, Social Security is huge.
Unfortunately, the system is in dire need of repair, and that spells bad news for young people.
Andrew Biggs is a resident scholar at the American Enterprise Institute in Washington, DC, and he’s also worked as deputy commissioner of the Social Security Administration. When asked if Social Security will be around for millennials, his answer isn’t reassuring.
“The answer to that is yes and no,” he says.
Biggs says that the program isn’t going anywhere, but what a young person receives will vary.
“The idea that you’re not going to get a penny from Social Security, I really think is false. On the other hand, what are the chances I’m going to get everything I’ve been promised from Social Security? And I think those chances are pretty slim,” he says.
If that isn’t depressing enough, Biggs goes on to say that postponing the problem isn’t helping anyone either.
“The Sooner you fix it the easier it is. For every year that goes by, we’re essentially putting off the problem and so it gets to be harder to solve,” says Biggs.
A solution to the problem isn’t going to come easily, and that shouldn’t surprise anyone. Economists each seem to have their own ideas of how to create solvency, and they fiercely debate one another over the pros and cons of their plans.
Melissa Favreault is a Senior Fellow in the Urban Institute’s Income and Benefits Policy Center. She says that even if economists can’t come to an agreement, though, almost all the proposed solutions include some mix of adjustments on the tax or revenue side, and adjustments to benefits.
“Some of the proposals that are most common are things like lifting the cap on earnings that are taxable for Social Security. There’s also some talk about increasing the taxation of benefits, or broadening the base, for example, to include things like health insurance benefits that are currently not taxed for Social Security purposes,” she says.
The proposed benefits adjustments are equally varied.
“One that we hear a lot about are things like increasing the full retirement age, or increasing the early retirement age. We also hear about things like reducing the cost of living adjustment. Among proposals that we’ve seen in a lot of recent plans are adjustments in the rate of growth for benefits,” says Favreault.
Though a solution will likely entail a combination of changes, Biggs says the most likely change he sees is the retirement age.
“The retirement age currently is slowly shifting from 65 up to 67. It’s something that is not an easy change to make, but I think encouraging people to work longer is really the best way to address these issues,” he says.
But some are disappointed with any and all attempts at fixing Social Security. When the system was designed, it was based on a three-legged stool of retirement: private pension benefits, private savings, and Social Security. Many see a decline in private pensions and savings and an increasing reliance on the third leg, Social Security. For young people, this means they should start saving for retirement now. For other advocates, the increasing reliance on Social Security is the beginning of a downward trend, and they want the freedom to take their retirement savings into their own hands—to privatize the system.
While privatization models of retirement savings have shown huge gains for savings invested in the stock market, Biggs is quick to point out that the biggest issue in privatizing the system is something called “transition cost.”
“If you take the money that you’re currently paying into Social Security and you put it into a personal account on your own, that’s money the system doesn’t have to pay out benefits to your grandparents. So during that time, you have to come up with additional money to cover this transition,” says Biggs.
It’s that transition cost, and the fact that the current system needs money flowing in to function, that necessitates a multifaceted, well-thought-out solution to Social Security’s solvency issues.
For Favreault, the most important thing for young people to understand, is that Social Security requires a group perspective.
“We’re kind of all in this together, and we’re saying that as a society, we want people of retirement age and people who become disabled, or the children of workers who die before retirement, that they’re protected,” she says.
Biggs admits that, for a lot of young people, that can be hard to swallow.
“Is it fair to say that a lot of younger folks are kind of getting ripped of? Well, that’s kind of what the numbers show. So you want to find some solution that smooths things out and makes the system sustainable, not just in a financial sense, but sustainable in that people feel it’s something they can really support,” he says.
For a lot of millennials, Social Security is something that they see having little effect on their day-to-day lives. For a solution to the rapidly approaching solvency crisis, though, millennials and other young Americans will have to decide this is an issue they want to fix. Otherwise, they’ll bear the financial consequences.