Social Security policies have been in constant flux almost since their creation. The first SS laws were passed under Roosevelt’s New Deal and the first changes were made only four years later. Cuts, tweaks, and rearrangements to the process of Social Security are nothing new.
However, the last few years have heralded changes which could drastically change the way Social Security works. Here are the basics of how these changes will affect future generations.
When Social Security was created, the ratio of beneficiaries to workers was about 15 to 1. Now, with the Baby Boomers beginning to retire and claim benefits, the ratio is more like 3 to 1 and likely to decrease even further (source: Nolo). And life expectancy is also increasing, meaning within the next few decades there will be an unprecedented amount of SS beneficiaries.
This creates some obvious issues: less income is being collected via payroll taxes than is being awarded to retirees with Social Security benefits. This increases the nation’s deficit, forcing the Labor Bureau to cash in unbacked Social Security bonds.
These circumstantial changes have required an overhaul of how Social Security operates. The overhaul started during the Regan administration, when the full retirement age was raised to 67. The two most recent proposed changes are cost of living adjustments and a chained CPI system.
Cost of Living Adjustments (COLA): COLAs were introduced to Social Security legislation in 1973 to allow adjustment according to the changes in inflation and living cost. The latest COLA increased Social Security benefits by 1.5%. The exact amount this affects an individual beneficiary depends on their Social Security status.
Chained CPI: COLAs are increased each year to compensate for inflation. The calculations are based on the Consumer Price Index, or CPI. Chained CPI is a form of COLA which, if passed, would factor in each beneficiary’s ability to choose the lowest priced food and clothing options, regardless of inflation changes.
How these Changes Affect the Future of Social Security
If you are about to retire and apply for Social Security benefits, your benefits will likely remain intact. Some experts predict that most strategies for maximizing combined benefits will be obsolete within the next few years, decreasing your options.
For those who have several decades before they apply for Social Security benefits, the picture is even bleaker. Unless drastic changes are made, 25-35 year olds will likely see a 25% decrease in their benefits by the time they reach retirement.
This grim prospect is the subject of current government debate. Unless the source of funding, the restrictions on beneficiary qualification, or the amount of benefits changes, the system will not continue to support all the individuals in need of Social Security benefits. Some believe the system will bottom out if no systemic changes are made, while others believe that minor adjustments will allow the program to recover (albeit slowly).
The debate and resulting legislation may change the way that Social Security disability cases are handled in the future, making it more difficult to maximize or protect your benefits (source: Kitchen Simeson Bellieau LLP., a lawyers firm in Cobourg).
It is difficult to tell at this point what the future of Social Security will be. The suggested legislative changes could prolong the existence of the system, or prevent a dying program from being replaced by a more efficient one. Luckily, politicians from both parties are dedicated to developing a working system that works as proficiently as possible.
This article is from Erika Remington. Originally from San Jose, California, Erika is a recent graduate of the University of California, Berkeley. She enjoys spending her time with her husband and 18 month old daughter. She also enjoys rock climbing and outdoor activities.