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Social Security provides a majority of the income for about two-thirds of Americans over age 65, but if you’re in your mid-50s or younger, it might be time to make alternative arrangements.

Experts don’t expect Social Security to disappear in the coming decades. But they’re concerned about the benefits that will be available for future retirees.

The program’s dismal outlook has long been known, but the recent economic crisis further scarred the program’s finances, bringing closer the day of reckoning when receipts no longer cover benefit payouts.

That’s bad news for anyone in their mid-50s or younger, because proposals that aim to put the system on sound footing almost invariably protect current beneficiaries and people near retirement, but everyone else can expect benefit cuts or tax increases or possibly a bit of both.

Currently, the program’s annual costs will exceed revenue in 2016. Then, that shortfall is covered by the system’s trust fund through 2037 — four years earlier than expected a year ago. (One reason: lower payroll-tax revenue thanks to the steeply higher unemployment rate.)

At that point, payroll-tax revenue still cover about 75 percent of benefit payouts through 2083. So, keep in mind that even if nothing is done, it’s not as though benefits are eliminated, even over the next few decades.

Some people have said that, given the weight of its other financial obligations, the federal government will be forced to renege on its Social Security obligations. But experts, both liberal and conservative, say that scenario is highly unlikely.

"Some people say the government will default on the trust fund and won’t pay. That won’t happen," said Andrew Biggs, a resident scholar at the Washington-based American Enterprise Institute and a former deputy commissioner for policy at the Social Security Administration.

"If they don’t want to repay it, (the government can) simply cut Social Security benefits, raise the retirement age, raise taxes. … It’s all under the control of the government basically," he said.

However, people paying into the system now are likely to get less than is being promised.

"The chance that people won’t receive their full promised benefits is actually quite high," Biggs said. "How big those benefit cuts will be and who they might affect is an open question."

Some say benefit cuts are less likely than raising payroll taxes to bridge the system’s shortfall.

Given the recent hit to people’s retirement plans, there’s "increasing recognition how important Social Security is, and how it serves as a backbone for most people’s retirement income," said Alicia Munnell, director of Boston College’s Center for Retirement Research. "I’d be surprised if there was any major cutting in the proposals to fix the system."

Already, some beneficiaries get less than they were promised. For one, the "normal" retirement age — when you’re eligible for full benefits rather than the reduced payout for early retirees — is inching higher, thanks to a 1983 law aimed at dealing with the looming funding shortfall. Workers born before 1938 collect full benefits at age 65; for people born later, the age for full benefits is slowly being raised to age 67. (For anyone born in 1960 or later, the retirement age is 67 quick pay day loan.)

Then there’s Medicare, the rising costs of which are taking a bigger bite of overall payments. Medicare and Medicaid combined will total almost 10 percent of GDP in 2040, up from 4.2 percent in 2008, while Social Security’s share will rise to 6.2 percent, up from 4.3 percent now, according to the Government Accountability Office, the investigative arm of Congress. Medicare’s funds are expected to be exhausted in 2017, two years earlier than expected last year.

And Medicare beneficiaries take some of the hit of those rising costs in their Social Security checks. Generally, Medicare Part B premiums (for doctors’ services) are deducted from Social Security checks. Since 2000, the average annual increase for the Part B premium has been 9.8 percent, versus the average 2.7 percent for Social Security’s annual cost-of-living increase, according to a report Munnell co-authored in October.

While there’s a "hold harmless" law that prevents most beneficiaries’ Social Security checks from decreasing because of steeper Medicare premiums, those health costs still eat up a portion of the Social Security cost-of-living increase.

Assume a monthly benefit of $1,000 and a premium of $100, for a total check of $900. Social Security cost-of-living increases alone would bring the original $1,000 benefit to $1,027 (using the average increase since 2000), but the larger Medicare premium increase slashes the amount to about $917, a 1.9 percent increase from $900, rather than the full 2.7 percent average cost-of-living increase.

And there’s another way benefit cuts are marching higher: the tax on benefits. If your "combined income" (adjusted gross income plus one-half of Social Security benefits plus nontaxable interest income) exceeds $25,000 for singles and $32,000 for married couples, you pay tax on up to 85 percent of benefits.

Those income thresholds are not indexed to wages or inflation, Munnell said.

Right now about 30 percent of recipients pay tax on their benefits. That will rise to 42 percent in 2020 and 52 percent in 2030, according to Munnell’s projections.

All told, by 2030 the average worker who claims at age 65 will get benefits that replace just 30 percent of earnings — down from 41 percent now — thanks to the higher retirement age, higher Medicare premiums and a bigger pool of benefits subject to taxes, according to a Center for Retirement Research report in 2007.

Protecting near-retirees is why young people should pray that Congress deals with the issue sooner rather than later.

"The problem is that the boomers have already reached 62 now and every passing month more and more people are entering the golden period" — that is, the age where any proposal to fix Social Security protects people, said Barbara Bovbjerg, director of education, workforce and income security issues at the U.S. Government Accountability Office.

"As a boomer I can say this: There are 80 million of us. We should do something with Social Security that makes boomers part of the solution, not part of the problem," she said. "Because once the boomers (retire), you have many fewer options."

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Filed under: management, money by Finance Boss