College Graduates Face Uncertainty with Social Security

June 4, 2013

With graduation season nearly finished, another group of young workers is set to enter the labor force. Members of this group confront an immense challenge in planning for retirement: There is a great deal of uncertainty about the Social Security taxes they will face and the benefits they will receive. Acting now not only reduces the burden of adjustment on future generations, it also reduces the uncertainty these generations face in planning for retirement, say Sita Slavov and Aspen Gorry, senior fellows at the American Enterprise Institute.

  • With the trust fund projected to be exhausted in the next two decades, either payroll taxes must be increased or benefits cut.
  • But uncertainty about the timing and scope of reform makes it difficult for young workers to make smart choices about work and retirement.
  • This uncertainty can be reduced by tackling Social Security reform now rather than later.

In a recent research paper, economists Erzo F.P. Luttmer and Andrew A. Samwick conducted a survey and found that:

  • On average, individuals between the age of 25 and 59 expect to receive only 60 percent of the Social Security benefits that they have been promised.
  • There's a great deal of uncertainty, as respondents differed in their assessments of how much their benefits would be cut.
  • The researchers estimated that people would be willing to tolerate an additional 4 percent to 6 percent cut in benefits in exchange for certainty about the level of benefits.

Some will argue that because the deficit for 2013 is now projected to be much smaller than previously expected -- only $642 billion, or 4 percent of gross domestic product -- Congress has time to wait to reform entitlement programs. Such a conclusion would be mistaken. Changes to entitlements are unavoidable. Benefits will have to be cut or taxes increased. But uncertainty about these changes can be avoided by making them now rather than later.

Source: Sita Slavov and Aspen Gorry, "A New Set of Graduates Faces Social Security Uncertainty," U.S. News & World Report, May 30, 2013.

 

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