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Social Security in the Long Run

Posted on:5/1/2012
Social Security is so fundamental to our society that no president and no Congress would ever allow the program to fail to meet its obligations. And when it is clearly understood that Social Security is an institution that will continue through time, it is easy to see that, in the long run, current workers will be the direct beneficiaries.

The long-run perspective is also necessary to understand how Social Security introduces a critical element of stability into retirement plans. The Social Security benefit formula guarantees that a constant proportion of prior earnings will be replaced for workers at different earning levels.

For younger workers, this means that, even before benefits are first received, their value is kept up-to-date with rising wages and increases in the standard of living. In fact, the retirement benefits for today's younger workers will be considerably larger (on average)--that is, they will have greater purchasing power--than those of today's retirees (even though the rate of return on their Social Security "investment" will generally be smaller).

The growth of wages over their lives will be translated by the benefit formula into larger benefits. Of course, their tax contributions will be greater, too. Using modest assumptions about the growth of the economy (an average of about 2 percent real growth per year over the next 75 years), Social Security's actuaries project that, whereas a worker who earned average wages throughout his life and retiring at age 65 in 2015 would receive $761.

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