This year will see a record number of Baby Boomers reaching the traditional retirement age. By 2030, they will all be at least 65. However, this creates a fiscal problem, as fewer taxable workers means less money for Social Security. If Congress does not act, we may face a serious crisis. Here’s how this imminent demographic shift could jeopardize the future of one of our most important government programs, and what may be done to mitigate it.
The Baby Boomers’ Role in the Economy
For decades, baby boomers, the generation born between 1946 and 1964, have helped fuel the American economy. For a long time, their sheer numbers fueled rapid economic growth, and because every worker paid into Social Security, the system appeared to be in good shape. However, as boomers began to leave the workforce in 2008, the number of retirees skyrocketed.
Not only are more retirees receiving benefits (and for longer periods of time, as life expectancy rises), but there are fewer young people entering the workforce today due to lower birth rates in their parents’ generation. This puts a strain on both ends: higher expenses for retirees living longer lives, and lower payroll tax revenue due to fewer people entering the workforce. This all puts a lot of pressure on social security.
The Trust Fund and Its Challenges
Without policy changes, the trust funds are projected to be depleted by 2034. The program is running low on 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 return. However, things changed about ten years ago. Over the last decade, we have paid out more in benefits than we have received in Social Security revenue.
Because the program had so many IOUs from previous years, cashing them in enabled it to continue making payments in full. There are currently around $3 trillion in IOUs, but this figure is decreasing year after year. By 2034, all IOUs will have been cashed in, resulting in an immediate 25% cut in retiree benefits. This figure is expected to rise as the number of workers per retiree continues to fall.
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 those aged 55 to 66 had no retirement savings. Can you imagine losing 25% of your current take-home salary? Having 25% less income with which to pay for your rent, groceries, and utilities? It is especially important for those who do not have a college degree or who earn the lowest wages.
Furthermore, seniors with lower retirement incomes tend to spend less. This means less economic activity and fewer jobs, as businesses may be forced to lay off employees as consumer spending declines. It could have a domino effect, potentially leading to a recession.
The Impact on Future Generations
This issue will impact not only Baby Boomers, but all future generations.* They might be asked to pay a slightly higher payroll tax. More importantly, they might be asked to continue working for longer. The funding gap for Social Security is one of multiple expenses that add to the federal budget deficit, requiring us to borrow money and issue bonds. This puts pressure on interest rates, making it more difficult to buy a house. It is also possible that Congress will need to cut spending on other programs, such as the military or the environment, in order to continue funding Social Security.
The Need for Legislative Action
So, what needs to happen to strengthen Social Security’s foundation? Congress must enact a new law. When and what kind of law? We still do not know. Congress has not made any significant changes to Social Security since the Nixon administration. Benefit and retirement program changes take a long time to take effect. 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 implement them.
“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.”*
Several solutions have been proposed over the years, many of which call for the country’s wealthiest individuals to pay higher taxes. However, policymakers generally disagree on whether to raise taxes, or to cut benefits. These are the two primary approaches to resolving this issue, but no single option will solve Social Security’s long-term problems. Instead, Congress will most likely have to consider a series of steps in order to address it collectively.
However, economists do not believe any action will be taken soon. Everyone, including those on Capitol Hill, is aware that Social Security has this problem. However, no one, especially not those on Capitol Hill, seems willing to act. As it stands, “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.