Except for recent contributions, all of the money that you’ve contributed to the Social Security system throughout your lifetime has already been spent.
That’s because Social Security is a pay-as-you-go system. Contributions from people working today go to people who are retired today. Your contributions will be long gone by the time you retire.
While the Social Security system currently is solvent, trustees of the Social Security system’s two funds, which support retired and disabled workers, project in their recently released annual report that the funds will be depleted in 2034. As trustees of the programs noted, the funds “fail the test of long-range close actuarial balance.”
Trustees project that annual benefits paid out will exceed the Social Security taxes workers and employers pay beginning in 2022.
And the trustees may be overly optimistic. The Congressional Budget Office, which tends to make rosy predictions about government programs, estimates that the funds will be depleted by 2030. After that, the amount Social Security pays out every year will exceed what it takes in by more than $400 billion.
“Current benefits for retirees already exceed the system’s payroll-tax receipts,” Martin Feldstein wrote in The Wall Street Journal. “Benefits are therefore payable under current law only by drawing on the so-called trust fund, an accounting record of previous Social Security surpluses.”
And the Cato Institute reported that, “All together, Social Security is facing future shortfalls worth more than $24.9 trillion. The so-called trust fund is simply an accounting measure, specifying how much money the federal government owes the program out of general revenues, not an actual asset that can be used to pay benefits.”
The Down Side of Living Longer
A pay-as-you-go system worked fine when Social Security was established in 1935, but today people are using Social Security for far longer than they used to; they’re generally retiring at 65, as they did in 1935, but living into their 80s and beyond.
“When Social Security was first established in 1935, a retiree aged 65 would live to age 77 on average,” MoneyWatch reported. “Today, that 65-year-old will live to at least 85.”
The Social Security Administration noted that life expectancy at birth in 1930 was only 58 for men and 62 for women, but the infant mortality rate was higher. Retirees who lived to 65 could expect, on average, to live to age 77. Those who never made it to 65, of course, never collected on their Social Security contributions.
MoneyWatch also reported that, “In 1950, 16 workers paid Social Security taxes for every person collecting benefits. Today, that ratio has shrunk to 3.3 to one, and by 2034, it’s projected to be as little as two to one.”
Think about that. Instead of contributions from 16 people supporting each retiree, contributions from two people will need to support each retiree.
Feldstein wrote that the government will face the choice of cutting all individual benefits by about a third, raising the payroll tax by 50% (from 12% to 18%), or using $400 billion a year of income-tax revenue to supplement the payroll-tax funds.
The age for eligibility could also be raised or benefits could be reduced for those with higher incomes, but that would mean the harder you work, the less you have to show for it during retirement.
The eligibility age has gradually been increasing, so that many retirees will not be eligible for full benefits until age 66 or 67. Eligibility for reduced benefits begins at 62 and the amount of the reduction has also been increased, but these changes are providing minimal help in keeping the system solvent.
77 Million Boomers
The generation of baby boomers that has begun to retire will further strain the system. The U.S. Census Bureau says there are more than 77 million baby boomers, defined as those born between 1946 and 1964; all of them will be over 65 by 2030 and will represent about 20% of the population.
Consider, too, the increase in the number of disabled Americans that has taken place since 1960.
As we previously noted: “In his book, Men Without Work: America’s Invisible Crisis, Nicholas Eberstadt noted that in 1960 there was one worker certified as being disabled for every 134 workers who had no disabilities. By 2010, there was one certified disabled worker for every 16 non-disabled workers. The Occupational Safety and Health Administration (OSHA) was created in 1970, so today’s workplace is much safer than the workplace of 1960. So why have disabilities increased by 837%?”
Add It All Up
Reforming Social Security will be a difficult challenge. When President George W. Bush made it a top priority in 2005, he failed. He sought to allow employees to invest part of their Social Security contributions into retirement accounts.
The AARP, ironically, was among its leading opponents. If the proposal had succeeded, the system would likely be in better financial shape today. By the end of 2005, the DJIA was 10,717.50. In mid-July, it was 21,637.74. In other words, $1 invested in an index fund in 2005 could be worth $2 today.
On its own, figuring out how to keep the Social Security system solvent will be a difficult challenge. Consider it in the context, though, of other government challenges, some of which we’ve recently written about.
“Combined, Social Security, Medicare and Medicaid now account for 47 percent of federal spending, according to the Cato Institute, “a portion that will only grow larger in the future. And although the spending for Obamacare has just begun, it too will soon consume an ever larger portion of the federal budget.”
Hold on to your wallet.