A record number of Baby Boomers will reach the traditional retirement age this year. By 2030, they will all be at least 65 years old. This creates a fiscal problem, however, because fewer taxable workers ultimately means less money for Social Security. If Congress fails to act, we’ll face a major crisis. Here’s how a demographic shift may threaten the future of one of our most important government programs, and what can be done to address it.
The Baby Boomers’ Role in the Economy
For decades, baby boomers, the generation born between 1946 and 1964, have supported the U.S. economy. For a long time, their sheer numbers contributed to rapid economic growth, and because every worker contributed to Social Security, the system appeared to be in good shape. However, as boomers began to leave the workforce in 2008, the number of retirees increased dramatically.
Not only are more retirees collecting benefits, and for longer periods of time, given that life expectancy is up, but there are fewer young people entering the workforce today because birth rates were lower in their parents’ generation. This creates a squeeze on both ends: higher expenses for all those retirees living longer lives, and lower payroll tax revenue as a result of fewer people entering the workforce as birth rates fall. This all puts a significant amount of pressure on social security.
The Trust Fund and Its Challenges
Without policy changes, forecasts indicate that the trust funds will be depleted by the year 2034. The program is running out of Treasury bonds, which are essentially government IOUs. For many years, Social Security collected more money than it needed to pay out in installments, so it lent money to the government for other programs and received IOUs in exchange. However, things changed around ten years ago. For the past decade, we have paid out more in benefits than we have received in Social Security revenue.
Because the program had so many IOUs from prior years, cashing them in allowed it to continue paying payments in full. There are currently approximately $3 trillion in IOUs, however this amount is decreasing year after year. By 2034, all IOUs will have been cashed in, resulting in an immediate 25% reduction in retiree benefits. This figure is anticipated to rise as the number of workers per retiree continues to decline.
The Reality of a Social Security Shortfall
According to studies,* the majority of Americans rely on these monthly benefit checks to supplement their retirement income. According to Census Bureau data,* over 50% of persons aged 55 to 66 had no retirement savings. Can you imagine losing 25% of your take-home salary right now? You’d still need to pay rent, groceries, and utilities. It is especially important for those without a college degree and those on the bottom end of the wage scale.
Furthermore, seniors who have less retirement income tend to spend less money. That means less economic activity and fewer jobs, since firms may be forced to lay off employees when consumer spending falls. It could cause a domino effect, potentially resulting in a recession.
The Impact on Future Generations
This problem will affect not only Baby Boomers, but all subsequent generations.* They may be asked to pay a slightly higher payroll tax. More importantly, they may be asked to work a bit longer. The funding shortfall for Social Security, like most other issues in the economy, is not isolated. It contributes to the overall federal budget deficit, requiring us to borrow funds and issue bonds. This puts pressure on interest rates, making it more difficult to afford a home. It is also possible that Congress will have to reduce spending on other programs, such as the military or the environment, in order to continue funding Social Security.
The Need for Legislative Action
So, you may ask, what needs to happen to put Social Security on a more solid foundation? Congress must pass a new law. When and what type of law? We still don’t know. Congress hasn’t made any changes to Social Security since the Nixon administration. Benefits and retirement program changes take a very long time to become effective. One of the last major Social Security reforms was in 1983, when the retirement age was raised to 67, but it took nearly 40 years to phase them in.
“There is a 10-year window, but we do not have ten years to act. There must be some kind of legislative solution between now and then. According to the law, the program cannot borrow money from anyone else. Social Security is too important and popular to let it run out of money.”*
Over the years, a number of solutions have been proposed, many of which demand that the country’s wealthiest individuals begin paying their fair share of taxes. However, policymakers generally disagree on whether to increase taxes, or reduce benefits. Those are the two main approaches you’ll see to solving this problem, but no single silver bullet will address Social Security’s long-term problems. Instead, Congress will most likely have to consider a number of steps to collectively address it.
However, economists do not expect any action to be taken soon. Everyone, including those up on Capitol Hill, understands that Social Security has this flaw. However, no one, particularly on Capitol Hill, is willing to take action. For the time being, “As we all apparently agree, Social Security and Medicare are off the books for now. We all wish politicians would show the courage necessary to tackle this issue now and not wait until the 11th hour.”*
*Watch this video from the Wall Street Journal to learn more.
