NEW YORK (CNN/Money) – For some, the debate over Social Security reform is a philosophical and moral debate.
But for others, all they really want to know is "How will I make out?"
The short answer is: there's no way to know yet because no consensus proposal has emerged.
There are, however, a lot of ideas floating around. And those most discussed have been put forth by President Bush and in Model 2 of the President's Commission to Strengthen Social Security.
Jason Furman, a senior fellow at the Center on Budget and Policy Priorities, has calculated what benefits might look like based on two key elements from those proposals:
- Individual accounts as outlined by the White House are created.
- And starting benefits for future retirees are indexed to price growth rather than wage growth, a key solvency measure proposed in Model 2.
Furman, it should be noted, has been an outspoken critic of the president's proposals for Social Security reform.
Nevertheless, we include his numbers here for two reasons: His calculations are based on the same methodology and data used by the Social Security Actuary's office. And Money magazine, which co-owns CNN/Money, looked at several sets of outside projections and concluded that Furman's were the most complete and reasonable.
A look at the numbers
We outline the estimated benefits for high-income and low-income workers born in 1965, 1985 and 2005. Click here to see the numbers.
So, for example, a high-income worker born in 1985 and retiring in 2050 is currently promised a total annual benefit of $27,361 in today's dollars. That would replace 30 percent of his income that he had before retirement. (That is, if he earned $100 a month while working, Social Security would provide $30 a month in retirement.)
Under a system where his starting benefits were indexed to price growth and he opted to put money in an individual account up to the limits proposed by the president, he would get a total annual benefit of $23,502. That would replace 26 percent of his pre-retirement income.
That assumes he could earn a 4.6 percent rate of return, after inflation. If he only earned a 3 percent return, his total benefit would be $18,599, replacing just 20 percent of his pre-retirement income.
Besides getting a lower replacement rate of his pre-retirement income, the younger a worker is under the proposals outlined above the more his total benefit would come from his individual account and the less he would get from the traditional system.
For example, a low-income worker born in 1985 will see a total benefit of $10,225 under the proposals, of which 57 percent will come from his individual account. The same worker born in 2005 will get 72 percent of his total benefit from his account.
Keep in mind, however, while the benefits under the proposals would be lower than that which are currently promised, those promises cannot be met unless changes are made.
As things stand now, after 2042, the system's trust fund will be exhausted and Social Security will only be taking in enough payroll tax revenue to pay 73 percent of benefits promised. (Those are estimates from the Social Security actuaries; the Congressional Budget Office estimates the trust fund won't be exhausted until 2052.)
Those changes may include raising taxes, raising the retirement age, lowering benefits, cutting spending on other programs or borrowing money to finance the system. In other words, something's gotta give. (To read more about just what may give, click here.)
Click to learn more about President Bush's proposals; and click here for a more detailed explanation of Model 2's proposal.