Revamping the System

How would the Social Security changes advocated by the latest entrant in the presidential race affect you? Here’s a look.

WORKERS

Currently: Workers pay 6.2% of their wages into Social Security; their employers pay an equal amount.

Lamm: Workers would pay 6.2% of their wages into Social Security, as would their employers. In addition, workers would be required to put 5% of wages into a “personal thrift account.”

CURRENT RETIREES

Currently: Benefits are paid based on retiree’s income over 40 years and are adjusted for inflation each year based on the rise in the consumer price index.

Lamm: Benefits would be calculated in the same fashion. However, there would be a one-year moratorium on cost-of-living increases. After that, inflation increases would be pared by half a percentage point of the CPI.

THE SYSTEM

Currently: The system operates on a pay-as-you-go basis, paying benefits to current retirees from contributions from current workers. Because there are now substantially more workers than retirees, the system is running at a surplus. But it is expected to encounter a cash deficit in 2012. By 2029, Social Security is projected to be bankrupt--with all surplus spent and contributions from current workers insufficient to pay benefits to current retirees.

At that point, employment tax rates would have to rise dramatically, or retirement benefits would be cut roughly 25% to 35%.

Lamm: Half the system would operate pay-as-you-go through a transition period likely to last 25 to 30 years. The other half--the 5% paid into personal thrift accounts--would be saved and accumulate interest. Retirement benefits would then be paid partly from the personal savings account and partly from the existing Social Security-type program.

CURRENT AND FUTURE RETIREES

Currently: There’s no guarantee that a retiree can live on Social Security benefits. Benefits replace only a portion of working wages.

Lamm: All retirees would be guaranteed an income amounting to at least 120% of the federal poverty level.

TAXES AND RETIREMENT BENEFITS

Currently: Social Security beneficiaries pay no tax on government retirement benefits if their incomes fall below certain thresholds--$25,000 for singles, $32,000 for married couples. They pay tax on 50% of Social Security benefits when earning up to $34,000 when single, up to $44,000 when married. Those who earn more pay tax on 85% of their Social Security benefits.

Lamm: All retirees, regardless of income, would pay tax on 85% of their Social Security benefits.