This year will see a record number of Baby Boomers reach traditional retirement age. By the year 2030, all baby boomers will have reached 65 or older. The fact that there are fewer taxable workers ultimately results in less money being contributed to Social Security, which is a problem for government funding. If Congress does not take action, we will be heading toward a major crisis. Today, we explain how this change could potentially endanger the future of one of the most significant government programs we have, as well as what steps might be taken to address this issue.
The Baby Boomers’ Role in the Economy
Baby boomers, the generation born between 1946 and 1964, have been a significant contributor to the economy of the United States for many decades. Due to the fact that every worker made contributions to Social Security, the system appeared to be in good shape for a considerable amount of time. Their sheer numbers significantly contributed to the rapid expansion of the economy. But, when baby boomers started leaving the workforce in 2008, the number of retirees began to increase dramatically.
Considering that life expectancy has increased, not only are there more retirees collecting benefits, but they are also collecting them for longer since they’re in retirement for longer. Additionally, fewer young people are entering the workforce today, because birth rates have gone down. This creates pressure on both ends: higher expenses for all of those retirees, who are also living longer, and lower revenue from payroll taxes as a result of fewer people entering the workforce. A considerable strain is placed on Social Security due to all of this.
The Trust Fund and Its Challenges
If there are no changes to the policies that are in place, it is anticipated that the trust funds will be exhausted by the year 2034. The Treasury bonds, which are essentially government IOUs, are running out, which is bad news for Social Security.
For many years, the Social Security Administration (SSA) collected more money than it needed to pay out in installments. As a result, the agency lent money to other government programs and received IOUs in exchange for the money. Over the course of the last ten years or so, however, we have distributed a greater amount of benefits than we have received in revenue from Social Security. Cashing in those IOUs, thankfully, has allowed the program to continue meeting its payment obligations. But, it’s estimated they’ll all be cashed in by the year 2034. This will result in an immediate reduction of 25% from Social Security benefits. The number of workers per retiree is expected to continue decreasing, which will likely result in an increase in this figure.
The Reality of a Social Security Shortfall
Studies have shown that the majority of people in the United States rely on these monthly benefit checks to supplement the income they receive during their retirement years. Data from the Census Bureau* indicate that more than fifty percent of individuals aged 55 to 66 do not have any savings for retirement. Would you be able to handle losing twenty-five percent of your take-home pay right now? This issue is of utmost importance for individuals who do not have a college degree and/or are at the lower end of the wage scale.
In addition, retirees who have a lower income during their retirement years tend to spend less money. When consumer spending drops, businesses may be forced to lay off employees, which results in an overall decrease in economic activity and a reduction in the number of jobs available. In other words, this problem may create a domino effect that could ultimately lead to a recession.
The Impact on Future Generations
This issue will not only affect members of the Baby Boomer generation, but also all subsequent generations. They might be asked to pay a payroll tax that is marginally higher than usual. The most important thing is that they might be asked to work a little bit longer. Similar to the majority of other problems in the economy, the shortfall in funding for Social Security is not an isolated occurrence. It makes a contribution to the overall deficit in the federal budget, which necessitates the borrowing of funds and the issuance of bonds. This brings about an increase in interest rates, which in turn makes it more challenging to afford a home. It is also possible that in order for Congress to continue funding Social Security, they will be required to reduce spending on other programs, such as those pertaining to the environment or the military.
The Need for Legislative Action
So, you might be wondering what steps need to be taken to establish Social Security on a more stable basis. A new law needs to be passed by Congress. When and what kind of law, if any? Right now, nobody knows. Congress hasn’t made any significant changes to the Social Security program since the Nixon administration. Changes to retirement programs and benefits also take a very, very long time to take effect. For example, when the retirement age was raised to 67 in 1983, it took nearly 40 years to implement the change.
“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 variety of solutions have been suggested, the majority of which require the wealthiest individuals in the country to start paying higher taxes. It is generally agreed upon by policymakers that the best course of action would be to either raise taxes or reduce benefits. These are the two primary approaches that you will see to solving this problem; however, no one solution will address all of the long-term issues that Social Security is facing. Instead, Congress will (hopefully) be required to look over a number of different plans to collectively address it.
Nevertheless, economists do not anticipate any action to be taken in the near future. Everyone, including those on Capitol Hill, is aware of the fact that Social Security has this problem on the horizon. However, seems willing to take any kind of action, 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.