For people in the 1960s birth cohort with income in the middle quintile, the benefit-to-tax ratio is projected to be 1.5, based on calculations using data from the Congressional Budget Office.5 For them, the expected value of their lifetime benefits is about 50 percent more than their expected contributions. This measure accounts not only for their projected path of earnings, but also the expected length of their life.
By contrast, people who are in the lowest income quintile of the 1960s birth cohort are projected to have a benefit-to-tax ratio of 2.7. That means that their lifetime benefits are expected to be almost three times the amount that they contributed into the system, even after accounting for their shorter-than-average life expectancies.
At the same time, those in the highest income quintile in the 1960s birth cohort are projected to have a benefit-to-tax ratio of only 1.1, which means that their lifetime benefits are expected to be a little more than the taxes that they paid. These results illustrate how Social Security provides social insurance: it redistributes income from retirees who have higher earnings to those with lower earnings, though the redistribution is not sufficient for the program to be sustainably funded.
Conclusion
The Social Security system faces major financial challenges. If reforms are not enacted, beneficiaries could face an across-the-board benefit cut of 17 percent in 2035 (on average) when the combined trust fund reserves are depleted. Because of the critical importance of this program for ensuring financial security for many retired and disabled people — especially those with low incomes — reforms are needed to ensure that the program can continue to provide benefits.
Any viable reform package will need to balance two priorities: adequacy of benefits for recipients and financial sustainability for the federal government. It should also be announced well in advance and phased in gradually to give people time to prepare and adjust their savings and retirement plans. There are many possible solutions which can be found on our Solutions webpage.
