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Retirement

You'll Still Get Social Security

But you might have to wait longer to collect skimpier benefits.

The cornerstone of most Americans' retirement plans is Social Security. More than 53 million people collect Social Security benefits each month. And for nearly two-thirds of elderly American households -- those with at least one member who is 65 or older -- Social Security provides at least half of their income. In some cases, it is the only source of income. What's more, 55% of 50- to 60-year-olds say they are counting on Social Security as a key part of their retirement income, according to a recent survey by Charles Schwab.

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But with the impending retirement of the baby-boomer generation and the shrinking number of workers to support them, something must be done soon to reverse the imbalance of growing benefits and shrinking revenues. By 2025, there will be just 2.3 workers paying taxes to support every retiree, down from 16 in 1950. Left as is, the Social Security trust fund will run dry around 2037.

Against that backdrop, the bipartisan National Commission on Fiscal Responsibility and Reform unveiled a controversial proposal to save Social Security through a combination of higher payroll taxes, lower benefits for wealthy retirees and, eventually, older ages for claiming benefits. The commission's proposal is merely a starting point for a national debate, and it could be years before these or any other Social Security reforms are enacted. But it should serve as fair warning to future retirees that benefits will be smaller and that you may have to wait longer to collect them.

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If you're 50 or older, you can probably count on collecting benefits similar to the amounts outlined in the annual statement you receive from the Social Security Administration. Younger workers may have to wait beyond age 67 to collect full benefits -- the current normal retirement age for those born in 1960 or later. (That already represents a 13% cut in lifetime benefits compared with recipients who collect benefits at age 65.) The commission recommends gradually raising the age for full benefits to 69 by 2075. And the formula to calculate future retirees' benefits may be readjusted to favor lower-income retirees at the expense of wealthier ones.

There is a certain undeniable logic to raising the retirement age. When President Franklin Roosevelt signed the Social Security Act into law in 1935, 65 was established as the age to receive retirement benefits -- even though the average life expectancy at birth was about 62 at the time. Today, the normal retirement age for full benefits is 66, yet the average American can expect to live until at least age 78 (half of the senior population will live even longer). More controversial is the commission's proposal to raise the age for early, reduced benefits to 64. Critics charge that many who are in poor health or have physically demanding jobs aren't able to work beyond age 62. The commission proposes a hardship exemption for them.

Higher-earning workers of all ages are likely to face bigger payroll taxes in the future to fund Social Security. The amount of wages subject to payroll taxes, currently capped at $106,800, could drift upward, to about $190,000 by 2020 under the commission's proposal. A survey of Kiplinger's readers found that a majority supported an increase in the early and normal retirement ages as well as raising the cap on taxable wages.

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