Baby boomers—the generation born between 1946 and 1964—have long bolstered the American economy. Their sheer numbers aided the economy’s rapid growth for a long time, and because all workers paid into Social Security, the system appeared to be functioning well. However, the number of retirees increased dramatically in 2008, as baby boomers began to leave the workforce.
Because life expectancy has increased, more retirees are receiving longer-term benefits. Additionally, fewer young people are entering the labor force today due to lower birth rates in their parents’ generation. This puts pressure on both sides: lower payroll tax revenue as fewer people enter the workforce as birth rates fall, and higher costs for retirees who are living longer lives. All of this puts a lot of strain on Social Security.
The Trust Fund and Its Challenges
Forecasts* indicate that if the current policy is maintained, the trust funds will run out by 2034. Treasury bonds, or essentially government IOUs, are running low in the program. Social Security used to collect more money than it could pay out in installments, so for many years, it accepted these IOUs in exchange for lending money to other government programs. But about ten years ago, things began to change. Over the last ten years, we have paid out more benefits than we have earned from Social Security.
Cashing in the many IOUs from previous years allowed the program to continue making full payments. Currently, there are approximately $3 trillion in IOUs, but this figure is declining year after year. Once all IOUs are cashed in by 2034, retiree benefits will immidiately be reduced by 25%. As the number of workers per retiree declines, this figure is expected to rise.
The Reality of a Social Security Shortfall
According to research,* the vast majority of Americans rely on these monthly benefit checks to supplement their retirement income. According to Census Bureau data,* more than half of people aged 55 to 66 did not have any retirement savings. Could you handle losing a quarter of your current take-home pay? Those at the bottom of the income scale and without a college degree should pay close attention to this issue.
Seniors with lower retirement incomes also tend to spend less. When consumer spending falls, businesses may be forced to lay off employees, leading to lower economic activity and fewer jobs. It could have a cascading effect, eventually causing a recession.
The Impact on Future Generations
This issue will affect all future generations*, not just the Baby Boomers. They might be required to pay a higher payroll tax. Or, more importantly, they may be asked to work for longer. The Social Security funding deficit contributes to the overall federal budget deficit. To continue funding Social Security, Congress may need to reduce spending on other programs, such as environmental protection or the military.
The Need for Legislative Action
So, what must we do to strengthen Social Security’s foundation? Congress will have to pass a new law. What type of law, and when? We are still unsure. Changes to retirement programs and benefits take a long time to set in. For example, raising the retirement age to 67 in 1983 was one of the last major Social Security reforms we enacted, but it took nearly 40 years to take effect.
“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 proposed solutions over the years call for the nation’s wealthiest citizens to begin paying their fair share of taxes. Politicians, however, are frequently at odds over whether taxes should be raised, or benefits reduced. There is no one-size-fits-all solution to Social Security’s long-term problems, but these are the two most common approaches. However, in order to address the issue as a whole, Congress will most likely need to devise multiple solutions that work in tandem with one another.
However, economists don’t expect any action to be taken soon. Everyone, even those on Capitol Hill, understands that Social Security has this problem on the horizon. However, no one seems willing to take action to change it; “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.
