This August marked the 80th anniversary for the Social Security system, a Great Depression-era social program that pays retirement and disability benefits to 65 million Americans. But with the retirement of baby boomers, analysts and commentators have begun to question whether the program will make it to the century mark, 20 years from now.
The issue is that the trust funds underlying the system are headed for depletion. By 2034, the committee in charge of Social Security has predicted that the combined trusts funding disability and retirement benefits will be insolvent.
There are two reasons for this. The first is that Americans are living longer. In 1940, the average male who lived to age 65 could be expected to live an additional 12.7 years. By contrast, a 65-year-old man today can expect to live nearly 20 more years. And the same is true for women, who have seen their post-65 life expectancy go from 14.7 years to 21.6 years. Suffice it to say that this puts pressure on the Social Security system, which must support more retirees for a longer stretch of time.
The second reason is that the baby boomer generation is now retiring en masse. Consequently, not only are people living longer, but a larger number of people are living longer. The net result is that the ratio of payees to beneficiaries is predicted to fall from 2.8-to-1 in 2014 down to 2.1-to-1 in 2040.
While all of this sounds ominous, and has led people in younger generations to conclude that the Social Security system won't be around when they retire, it's far too early to make predictions like this. It's helpful to keep in mind that this isn't the first time the Social Security system has peered down the barrel of financial insolvency. As I've noted previously, in 1983, the last time this issue was addressed, the remedy yielded three decades of annual surpluses and a current trust fund balance of approximately $2.7 trillion.
On top of this, even if the underlying trust funds are depleted doesn't mean that Social Security benefits will go away entirely. As a pay-as-you-go system, there will still be money coming in to fund benefits. The problem is that the inflow of funds will only be enough to cover about 79% of the outflow. Therefore even the worst-case scenario is only a reduction in benefits -- not the disappearance of benefits.
To be clear, a 21% decrease in benefits would prove catastrophic to many retirees when you consider that 65% of current beneficiaries count on their monthly checks for more than half of their income, according to the Social Security Administration. But it's for this reason that politicians will presumably, once again, stop even this from happening. Aged voters make up the most influential voting bloc in the country. If politicians allow their benefits to drop or disappear, then you can rest assured that few incumbents will survive the next election cycle.
The more realistic scenario consists of some combination of increasing revenue to the Social Security system and cutting costs. The former can be done by raising Social Security taxes, either by charging a higher percentage of net income or by lifting the income limit (currently, Social Security taxes are only assessed against the first $118,500 of a taxpayer's income). The latter can be done by raising the full retirement age, throttling annual cost-of-living adjustments, or phasing out benefits for people with large incomes in retirement, among other things.
The point here is that there's little doubt that the Social Security system will make it to the ripe old age of 100. We just don't know exactly what it will look like when it gets there.