Factor age in your Social Security plan

Q. My wife and I are in our late 50s. Our house is paid off and our youngest child finishes college in June. We are starting to plan for retirement, but don’t know how to factor in Social Security. What do you suggest? – Tom B.

A. Social Security is a federal entitlement program that guarantees retired workers, their spouses and some dependents a basic income for life. Since its inception, its liabilities have grown exponentially, as Congress has enhanced benefits. And it’s no secret that Social Security has a major funding problem.

For the most part, Social Security is financed by employers and employees. Both pay a 6.2 percent payroll tax on annual compensation up to an earnings cap ($106,800 in 2010).

Today, Social Security is taking in more money than it’s paying out. This excess is deposited into the Social Security Trust Fund, which, in turn, is invested in Treasury securities to finance federal spending. But benefit costs will exceed taxes and interest income beginning in 2024, and the trust will start depleting principal. By 2037, the trust will be depleted and Social Security will be able to pay only 78 percent of promised benefits.

Clearly, Social Security must be fixed. There are two ways to do this: decrease benefits or increase revenues. Here are several of the leading proposals.

•Increase full retirement age (FRA). Although life expectancy has increased by 10 years since Social Security began, the FRA has increased by only two years (from 65 to 67).

•Use the Consumer Price Index to calculate initial benefits. The National Average Wage Index is used to calculate workers’ initial benefits. Shifting to the index would result in lower initial benefits.

•Raise payroll taxes. Employers and their workers would pay a higher percent of compensation in payroll taxes.

•Raise the earnings cap. The index is used to set the earnings cap. Shifting to the National Average Wage Index would result in a higher earnings cap.

In reality, we are likely to see a combination of these proposals come into play.

The conventional wisdom is that “near retirees” (55 and older) and low-to-middle- income retirees are likely to see little or no change in benefits. The rationale is that near retirees have paid in for 30 to 40 years and lack the time to adapt to major changes in the system. And low-to-middle- income retirees already depend on Social Security benefits.

You and your wife are near retirees. Assuming you are low-to-middle-income (annual income of $250,000 or less), I would use the figures presented in your Social Security statements to estimate your retirement benefits. That said, you must monitor for changes to the system and be prepared to adapt as they unfold.

Planning tip: You can find out more about the future of Social Security at ssa.gov and the Center for Retirement Research at Boston College at crr.bc.edu.