(This post was written for inclusion in the upcoming Facing Up blog carnival on Social Security.)
What effect will aging Baby Boomers have on the Social Security retirement and disability programs? Huge might be an understatement. The Baby Boom generation is defined as those roughly 80 million Americans born between 1946 and 1964. The first of the Baby Boomers began to turn 62 in January of 2008. That, of course, is the early retirement age for Social Security benefits. The Social Security Administration predicts that about a million Baby Boomers will take early retirement, even though their monthly checks will be 25 percent lower than if they waited until the normal retirement age of 66.
As "Boomers" begin to retire, the effect on the Social Security system will be twofold – first, there will be more retirees receiving benefits. Second, there will be fewer workers paying into the system to support those retirees. Boomers didn’t have as many children per family as our preceding generation did. We had about two children per family, compared with three children per family in our parents’ generation. So we didn’t produce as many new workers to support the old workers now retiring.
In fact, experts say that we have gone from about 16 workers paying into Social Security for every person drawing benefits in 1950, to a little more than three to one today. In a few more years we’ll be down to about two to one. This is not guesswork. We absolutely know how many new adult workers we will have 20 years from now, because they have already been born. We’re not going to have a sudden, unexpected increase in the number of workers. (Unless we have a major change in our immigration laws.)
Economic predictions are all over the map on this, but one guesstimate is that about the year 2017 the Social Security system will start to see that incoming payroll taxes aren’t enough to match outgoing retirement and disability benefits. The timing is less important than the inevitability of the event. Every year from 2008 until 2025 will see another wave of Boomers retiring. Somewhere during that time span, the benefits will outgrow the income.
That doesn’t mean the system will collapse at that time, because there’s enough money in the Social Security Trust Fund to carry us for another 20-25 years beyond the point at which benefits begin to outweigh income. Or at least there is supposed to be money in the Social Security Trust Fund. Unfortunately, the politicians have been raiding that fund for years, and it now consists primarily of IOUs from the federal government.
When the Trust Fund runs out of money, that’s when the crunch will come. Politicians will have to make some difficult decisions – increase taxes, decrease benefits, or both. We all know that politicians are loath to make hard choices, but it’s going to have to be done. And really, it won’t take all that much of a change to get the Social Security system back in balance.
But an even bigger problem will be the Medicare and Medicaid crisis looming ahead of us. These programs face not only the demographic changes the aging Baby Boomers present, but also the runaway inflationary costs of medical and pharmaceutical care. The Medicare shortfall could be roughly five times as large as the Social Security shortfall. That should well and truly frighten you.
Some estimates are that by the year 2040, Social Security and Medicare will consume as much as 60 percent of income taxes collected. The remaining 40 percent of tax revenue would have to finance all the rest of the federal government.
My own, uneducated, guess is that Congress will not significantly reduce benefits for people already receiving Social Security retirement benefits, but will probably have to make major changes to Medicare and thereby reduce medical benefits. I suspect the government will also tighten rules even more on disability benefits, and try to save money by denying obviously qualified Social Security disability applicants.
The future is not hopeless for Social Security and Medicare but it’s certainly not rosy. Big changes are coming, and the sooner they come, the better off we’ll be. The question is whether Congress and the Administration will have the political willpower to deal with the tidal wave on the horizon or whether they will hide their heads in the sand, as usual.
Well, there weren’t too many baby boomers all these years that we have been paying into the system. If we just stop waging expensive foreign wars, we could restore the funds that the Federal agencies have “borrowed” from the trust fund.
Well this post could really use some more numbers. For example what is the projected income gap in 2017? Presumedly payroll tax will still be rolling in the door at 12.4%, an amount that would have been fully sufficient to pay all benefits in 2016, so what would the initial gap actually be? Well you would have to visit the actual Social Security Report and consult tables VI.F7 and VI.F8. The former would tell you the first year toll in inflation adjusted dollars is about $20 billion, the latter would put it in current dollars and put it about $30 billion. When we further note that this $20 or $30 billion is just a fraction of the actual interest being accrued and that the Trust Fund themselves are scheduled to continue growing until 2023 you might begin to wonder what all of the fuss is about. After all the General Fund borrowed the money why shouldn’t it be obligated to pay it back? If the sums needed were really crushing then supporters of Social Security ‘Crisis’ would have a point, but in real terms the cash crunch is really limited to the time period from about 2035 to 2041 and is no more than the current level of deficits.
As for the projected shortage of workers. Well for that we would have to first visit Table V.A1 Principal Demographic Assumptions. There we would see that the Trustees project a rather drastic drop off in both legal and illegal immigration. Why the US, faced with a labor shortage due to an aging population, not reach out as it always has and allow immigrants to fill the gaps is one of the underexamined aspects of ‘Crisis’. Now to Covered Worker Ratio (i.e people paying in to people paying out) for that we need to look at Table V.A2 where we can see that the projected ratio does got to .350 in 2030 up from .205 today. Which is to say from 5/1 to 3/1 (the standard projection never goes to 2 to 1). On the other hand this just takes into account the Aged. If we examine total Dependency Ratio including children we see a ratio of .667 going to .801 or from 3/2 to 5/4 but not approaching the rates of the 1960s and 70s when the ratio was generally over .900.
And all of this assumes some really poor economic numbers going forward. The standard model assumes that Real GDP will drop to 2.3% within the next five years and permanently slide to 2.0% in the ten years after that (Table V.B2). Put in even marginally better numbers and the outlook for Social Security starts looking pretty bright and that of Medicare not as bad as one would think from current rhetoric. All of the tables cited can be linked from this following URL from the Social Security.gov website. There really is no substitute for examining these numbers first hand. In my pretty extensive experience on this topic even most ‘experts’ seem to get their numbers second hand.
http://www.ssa.gov/OACT/TR/TR07/trLOT.html