The Declining Role of Social Security

Abstract:     
Policymakers have focused considerable attention on alternative ways of eliminating Social Security's 75-year financing gap, but lost in the debate is the fact that even under current law Social Security will provide less retirement income relative to previous earnings than it does today. Combine the already legislated reductions with potential cuts due to closing the financing gap, and Social Security may no longer be the mainstay of the retirement system for many people. Recognizing the declining role of Social Security is important because future retirees will need to find alternative income sources as they age.

Today, the frequently quoted replacement rate for the "medium earner" who retires at age 65 is 41 percent; that is, Social Security benefits are equal to 41 percent of the individual's previous earnings.1 Under current law, three factors will reduce this replacement rate: 1) the extension of the normal retirement age; 2) the increase in Medicare Part B premiums; and 3) the taxation of Social Security benefits. The following section considers the impact of each of these developments.

Number of Pages in PDF File: 4

Keywords: social security, retirement, replacement rate

working papers series