Baby boomers make up that huge demographic that came of age in the 1960s and 1970s. Born between 1946 and 1964, this vast cohort began to reach age 62 in 2008. By 2031, the youngest boomers will have passed the Social Security full retirement age of 67 (for people born in 1960 or later), at which point there will be 75 million people over the age of 65—nearly twice the 39 million who were 65 in 2008.
There has been speculation whether the baby boomer generation will bankrupt Social Security. However, it's not the size of the generation that's a concern but their life expectancy. In 1935, when Social Security began, people who reached 65 years of age could expect to live an additional 12.5 years. Currently, women aged 65 can expect to live another 21.5 years, while men can live another 19 more years.
Let’s look at the facts to see where Social Security stands going forward.
- Baby Boomers were born between 1946 and 1964 and are now retiring and receiving Social Security benefits.
- Currently, there are 2.7 workers for every Social Security beneficiary, but by 2035, there will only be 2.3 workers for each beneficiary.
- The Social Security fund that pays retiree benefits will be depleted by 2033 if no changes are made but won't go bankrupt due to Social Security taxes.
- A combination of hiking payroll taxes and cutting benefits by raising the full retirement age could help shore up the system.
As of the beginning of 2020, there was almost $2.9 trillion in the trust funds covering retirees and those with disabilities. There are two funds: The Federal Old-Age and Survivors Insurance (OASI) and Federal Disability Insurance (DI) trust funds, together known as OASDI.
When Funds Will Be Depleted
Despite the Social Security fund receiving money from payroll taxes, the fund's resources are not infinite. According to the 2021 Annual Report, the Board of Trustees, which oversees both funds, stated that financial projections show the Social Security fund (OASI) will run out of money by 2033.
The fund will be solvent enough to pay scheduled benefits until 2033, but after that point, the fund will only be able to pay 76% of the scheduled benefits with continuing tax income.
The 2021 annual report also showed that the Disability Insurance (DI) Trust Fund, which pays disability benefits, will be able to pay its scheduled benefits until 2057. However, the fund's reserves will be exhausted after that point, but continuing tax income is expected to be enough to pay 91% of scheduled benefits.
Why Funds Will Be Depleted
The 2021 report noted that both funds had been significantly affected by the COVID-19 pandemic and the 2020 recession. The trustees indicated that their projections were "best estimates" as to the extent of the pandemic's impact on the funds.
Another issue is demographics: The ratio of Social Security beneficiaries to workers who pay into the system is shifting. In 2021, there are 2.7 workers for each beneficiary, but in 2035 that number is expected to fall to 2.3 workers per beneficiary. 89.6% of the funding for retirees and disabled workers comes from Social Security taxes, which current workers pay, so it's easy to see how this change is straining the system. The remaining 10.4% of the system's funding comes from interest earnings and revenue from taxation of OASDI benefits.
Does the depletion of the trust fund mean Social Security is bankrupt? In a word, no. As long as workers are paying their taxes, there will be money to pay benefits. However, once the reserves are gone, the payouts will be less than the current benefit amounts (as noted earlier) unless Congress acts before then to replenish the funds.
The Potential Solutions
There's cause for concern since the depletion dates are fast approaching, and a reduction in benefits is not ideal. However, this issue is far from a "surprise." Since Feb. 1, 2016, there have been more than 45 proposals reported by the Social Security Administration currently in various stages of review by the U.S. government. Here are three proposals:
- Raise the full retirement age for Social Security benefits. Full retirement age is scheduled to rise during the coming years to age 67 for those born in 1960 and later. Some have argued that it should be 69 or 70, given how lifespans have expanded since Social Security began.
- Increase the payroll tax rate to 15.08%. This would involve raising the combined tax rate of 12.4% by 2.68%. Employers and employees would each pay 7.54% instead of the current 6.2%. However, even this increase may not cover the full amount needed.
- Raise or eliminate the payroll tax cap. The ceiling on which Social Security taxes must be paid is $142,800 in 2021 and is adjusted for inflation every year. Completely eliminating the payroll tax cap could cut the projected 75-year deficit in half.
The Bottom Line
While the aging of the baby boom generation is changing the math for the future of Social Security, it won't lead to the system's demise. Even if the trust funds run out of money, benefits will be covered by workers who pay Social Security taxes.
Changes could be made that prevent the depletion of the trust funds. Social Security was rescued in 1983 when taxes were increased and benefits curtailed—a bipartisan solution between the House and Senate under President Reagan. Given that Social Security is one of the most prized social programs in the U.S., there is reason to be hopeful that its funding problems will be addressed again.