and provides a safely net for those who cannot (or are not expected to) obtain retirement income on their own through individual savings, pensions, or postretirement earnings.12 The program also provides benefits to dependents without reducing the primary earner’s benefit. For all but the highest-earning 20 percent of older Americans, Social Security is the largest single source of income (Reno and Lavery, 2009). The program, moreover, provides continuing benefits for surviving spouses and dependent children if a worker dies before retirement.
Social Security helps people reduce the risk of having inadequate resources later in life by requiring them to contribute a portion of their earnings in exchange for earned benefits they will receive when not working. Also, in retirement a spouse receives either one-half of the other spouse’s monthly benefits (if a nonworker and married to a worker) or her or his own Social Security benefits, whichever is larger.
It is important to keep in mind that currently scheduled benefits rise over time for successive cohorts of new retirees, even though replacement rates for those retiring at the full benefit age remain relatively constant.13 In order for future cohorts of retirees to have the same percentage of their covered earnings replaced by Social Security as current retirees, initial benefit levels have to rise over time with real wage growth. Wage growth is expected to continue to exceed inflation by about 1 percent a year on average because increases in per capita productivity result in increases in total compensation (i.e., earnings plus benefits). Accordingly, adjusted for inflation, Social Security benefit payments for workers who retire at age 65 would nearly double over the next 75 years (see Table C-3 in Appendix C) if no changes are made to the current benefit formula and if program revenues are adequate.