This year, a record number of Baby Boomers will reach the traditional retirement age, and all Baby Boomers will be at least 65 by 2030. However, this poses a financial problem, since fewer taxable workers eventually translate to less funding for Social Security. There will be a severe crisis if Congress doesn’t take action regarding this. Here’s how one of our most significant government programs could be threatened by a demographic shift, and what may be done about it.
The Baby Boomers’ Role in the Economy
The baby boomer generation—those born between 1946 and 1964—has bolstered the American economy for many years. Their sheer numbers have helped the economy grow rapidly for a long time, and since all workers paid into Social Security, the system seemed to be doing well. However, the number of retirees rose sharply in 2008 as baby boomers started to leave the workforce.
Because life expectancy has increased, more retirees are receiving benefits for longer periods of time. Additionally, fewer young people are joining the workforce today due to lower birth rates in their parents’ generation. This puts pressure on both sides: lower payroll tax revenue, because fewer people are joining the workforce as birth rates decline, and higher costs for all those retirees living longer lives. All of this places a great deal of strain on social security.
The Trust Fund and Its Challenges
Forecasts show that the trust funds will run out by 2034* if policy remains unchanged. Treasury bonds, which are essentially government IOUs, are running low in the program. Social Security collected more money than it needed to pay out in installments for many years, so it received these “IOUs” in exchange for the money going to fund other government programs. But about ten years ago, things started to change. Over the last ten years, we have disbursed more benefits than we have earned from Social Security.
Cashing in the numerous IOUs from previous years has enabled the program to continue making full payments. Currently, there are about $3 trillion worth of IOUs, but the number is declining annually. When all IOUs are cashed in by 2034, retiree benefits will be immediately reduced by 25%. As the number of workers per retiree continues to drop, this number is expected to increase.
The Reality of a Social Security Shortfall
The majority of Americans depend on these monthly benefit checks to supplement their retirement income. More than half of people aged 55-66, according to Census Bureau data,* have no retirement funds. Would you be able to bite the bullet of losing a quarter of your current take-home pay? Remember that in retirement, you still need the money for utilities, groceries, and potentially paying rent. Those at the bottom of the income spectrum and those without a college degree should be particularly mindful of this.
Additionally, seniors with lower retirement incomes typically spend less. When consumer spending declines, businesses may be forced to lay off workers, which results in lower economic activity and fewer jobs. This all might have a cascading effect that leads to a recession.
The Need for Legislative Action
What must take place to give Social Security a stronger foundation, one might ask? A new law needs to be passed by Congress. What kind of law, and when? We’re still unsure. Congress essentially hasn’t altered Social Security since the Nixon administration. And, changes to retirement programs and benefits take a very long time to take effect. Raising the retirement age to 67 in 1983 was one of the last major Social Security reforms, but it took almost 40 years to finally implement.
“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.”*
Many of the solutions that have been put forth over the years call for the wealthiest citizens of our country to start paying their fair share of taxes. Politicians, however, typically cannot agree on whether taxes should be raised, or benefits should be cut. No one solution will solve the long-term issues with Social Security, but those are the two primary methods you will see for resolving this issue. Instead, Congress will probably need to determine a multiple-step plan to address the issue.
Economists do not anticipate any action being taken anytime soon, though. Social Security has this problem, everyone knows it, even those on Capitol Hill, and yet nobody seems willing to do anything about it, especially those on Capitol Hill. 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.