(MONEY Magazine) – If you're like many middle-class working Americans, you're not overly optimistic about what you will eventually get from Social Security. In a recent poll of 300 MONEY subscribers conducted by the Gallup organization, 53% said that they believe benefit levels are likely to be cut for people who retire in the future, and 54% said they think that payouts could be eliminated for upper-income retirees. These concerns will only be worsened by discussions of Social Security cuts at budget deficit reduction talks now under way in Washington. Is the widespread cynicism about Social Security justified? To find out, MONEY undertook an extensive analysis of the system's outlook. Our chief discovery may surprise you: despite all the belt-tightening talk, your benefits will probably be higher than you expect. In fact, you are likely to get more, in today's dollars, than someone retiring now does. To be sure, Social Security's looming fiscal problems will cause benefits to be cut -- though not from this year's levels or even from current levels adjusted for inflation. Few people realize that under the present law, annual benefits for people retiring in the future at age 65 will almost certainly be much higher than those received by today's retirees; it's from those bountiful levels that the cuts will come. The reductions will take the form of increases in the normal retirement age (to as high as 69, according to our analysis) and in taxes. In the MONEY/Gallup poll (margin of error: plus or minus six percentage points), 65% expected each of these changes. Such cuts will not be painless. If you are 30 years old today and plan to retire at age 65 in 2025, you are likely to receive only 80% of your full retirement benefits and to have 85% of what you get subject to income tax (compared with a maximum of 50% today). Nonetheless, payment levels at that time will be so generous that you could still collect a check as much as 18% larger than a comparable 65-year-old today, even after inflation and taxes are taken into account. Your standard of living, however, is likely to be so much higher 35 years from now that Social Security will probably provide a smaller part of your retirement income. So you'll have to rely more on other sources to maintain your pre-retirement living standard. The table on page 94 shows how much you can expect to get if the Social Security system is amended in ways that appear most likely. Of course, forecasts are only educated guesses, and in this case they are based on economic, demographic and political assumptions. To appreciate why these assumptions translate into an ever-rising level of benefits, you have to understand how the system works. Most people know that once they retire, their Social Security benefits will rise with inflation. But Social Security's promise to current wage earners is more extravagant: the system pledges to pay a starting benefit equal to a certain percentage of salary, up to a maximum that rises each year with the average wage rate. Because the formula is tied to wages, which tend to outpace inflation, each new crop of retirees will start out at a higher level of real benefits than their predecessors did. The maximum age-65 payout in 2025, for example, is projected to be $17,829 a year in 1990 dollars, compared with $11,700 today. A problem will arise, however, when the baby-boom generation begins to file for retirement benefits around the year 2010. Over the 20 years that follow, the ratio of Social Security taxpayers to beneficiaries will drop from around 3 to 1 to less than 2 to 1, sending the program's costs, relative to wages subject to Social Security taxes, soaring by 47%. If there are no further changes, costs will begin to exceed revenues around 2017. What happens then? Many politicians believe that the system can plug the gap by drawing down the vast sums that will have accumulated in Social Security's trust fund -- essentially, the program's bank account at the Treasury. The trust fund buildup will occur because tax hikes and benefit cuts enacted in 1977 and 1983 will raise much more money over the next few decades than the system needs. This year, for example, workers will pay some $46 billion more in Social Security taxes than retirees will collect. Each year's surplus fattens the trust fund, which could swell to around $7 trillion by 2017, when the system starts to go into the red. In theory, the fund can then be tapped to cover annual deficits that will reach more than $387 billion in 2025. So the problem's solved, right? Wrong. The Social Security trust fund, it turns out, is a bookkeeping illusion. By law, the trust fund must invest entirely in Treasury bonds. This is just another way of saying that the Treasury borrows the money -- to spend on bombers, paper clips, congressmen's junk mail and other routine government expenses -- and issues the fund an IOU in return. If Social Security eventually cashes in the IOUs, taxpayers would have to pay them off. Thus drawing on the trust fund merely supplements Social Security tax revenue with money from income and other taxes. ''With or without a trust fund, the same amount has to be taken out of the taxpayers' hands,'' explains A. Haeworth Robertson, Social Security's chief actuary in the mid- 1970s and now a Washington consultant on retirement policy. Obviously, the burden that the system will impose in the future depends in large part on trends in population -- specifically the ratio of taxpayers to retirees. For the sake of consistency, this story relies on the Social Security Administration's own demographic assumptions, such as a stable birth rate and increasing life expectancy for the elderly. We also used Social Security's own economic assumptions. The key one is that worker productivity will rebound from its depressed levels of the past two decades and increase by 1% to 2% a year; it's rising productivity that leads to higher wages. In the unlikely event that this expectation proves far too optimistic, the taxes required to support the system could double or triple. Even if Social Security's economic assumptions are on the mark, at some point workers of the future will balk at the rising cost of maintaining the benefits now being promised. Once it becomes evident that the system is going to drain hundreds of billions of dollars needed to fund other federal government programs, it is hard to imagine that taxpayers will not demand reform. The likely date: a few years before 2017, when Social Security's finances swing into deficit. Says Carolyn Weaver, a resident scholar of the American Enterprise Institute: ''You can almost hear the slogan: 'Social Security has to pull its own weight.' '' To keep the system on a pay-as-you-go basis, Congress will probably eliminate the deficit partly by cutting benefits and partly by hiking payroll taxes. A set of likely changes, developed for MONEY by Bruce D. Schobel, a former senior policy adviser with Social Security and now an actuary at New York Life, serves as the basis for our table on page 94. The details: ! -- The age at which new retirees become entitled to full benefits would be moved back by two months each year starting in 2000, until it reaches 69 in 2023. -- The fraction of benefits subject to income tax would rise from a maximum of 50% today to 85%, effective in 2025. -- The Social Security payroll tax would go up from 6.2% to 7% in 2025. The following describes the effects of these changes on three broad age groups. If you are retired now or are planning to retire before 2000: You have little to fear from changes in the Social Security law. Despite the current proposals to include benefit cuts in a budget accord that reduces the federal deficit, congressional inertia will probably postpone any serious action for 20 years. Because of the 1983 reforms, though, you may see more of your benefits taxed away. Under current law, up to half your benefits are subject to income tax if the sum of your non-Social Security income plus half your benefits exceeds $32,000 ($25,000 if you are single). Unlike most other thresholds in the tax code, these aren't indexed to inflation. Thus if your income goes up along with the cost of living, an increasing portion of your benefits will be taxed. If you are now between the ages of 37 and 52: Sometime during your retirement, which will probably start between 2000 and 2018, Congress and taxpayers will have to confront the shortfall in Social Security's revenues. Chances are very good that your benefits will be stingier than the system is promising. One such curtailment is already in the law: the normal retirement age will creep up by two months a year between 2000 and 2005, and again between 2017 and 2022. In MONEY's forecast, the increases would continue between 2005 and 2017 and extend through 2023. With that scenario, those workers now under 30 could not claim full benefits until they reached age 69. In either case, you will still be able to retire as early as 62, but you would pay a bigger penalty than early retirees do now. For example, if you retire at 62 today, when the normal retirement age is still 65, you get 80% of your full benefits. If you are now 41 and you retire at 62 in 2011, under current law you would get 75%. With the further tightening predicted by MONEY you'd be entitled to just 70%. Similarly, if you are now 44 and you retire at 65 in 2011, the current law would grant you 95% of your full benefits; in MONEY's scenario, you'd get 90%. Nonetheless, because of wage growth, you would still receive more, even after inflation, than someone retiring at 65 today. If you are now 36 or younger: Today's 36-year-olds, slated to start retiring in 2016, are likely to file for benefits in the midst of a fierce national debate on Social Security reform. Whatever changes in the program are adopted, they will probably be phased in, granting those now in their mid-thirties or younger a few years to prepare. But the bulk of the new rules will almost certainly be in place by 2025, the year today's 30-year-olds reach 65. Beginning in that year, if you retire at age 65, your check will be only 80% of the full age-69 benefit, according to MONEY's forecast. In addition, as much as 85% of what you receive will be taxable. But even so, annual wage growth of 5% to 6% between now and 2025 would push real, after-tax benefits nearly a fifth higher than those of workers retiring this year. One note of caution: although benefit levels will increase, they may not seem quite as munificent in 2025 as they would today. Thanks to rising wages, average 65-year-olds preparing to retire in 2025 will have incomes 57% greater than the average pre-retiree does now. So even though their pretax checks will be 30% higher, their benefits will amount to only about 36% of their lofty pre-retirement wages, compared with about 42% currently. Thus you may have to supplement Social Security with private pensions and savings to a greater degree than retirees do now, and you should factor that into your retirement planning. You are likely to enjoy a considerably higher standard of living in the future, but maintaining it in retirement will depend increasingly on your own efforts.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: WHAT SOCIAL SECURITY WILL PAY YOU AT AGE 65 This table, prepared with the help of Ira Siegler, a partner at the benefits consulting firm Kwasha Lipton, compares the Social Security benefits that you are promised under current law with those that you would receive if the system is changed in ways that MONEY considers likely. Because MONEY is forecasting that taxes on Social Security will be increased, we show benefits on both a pretax and an after-tax basis. To eliminate the effects of inflation, all amounts have been converted into today's dollars. Workers destined to receive average benefits currently earn about $20,500 a year; maximum payouts will go to those now making $51,300 or more. After-tax figures assume that average earners will have other retirement income equal to their benefits and that maximum earners will have $25,000 of outside income.