The outsized Baby Boomer generation, named for the big increase in birth rates after World War II, has always made waves. The Boomers' golden years will be no different.
Born between 1946 and 1964, this vast cohort came of age in the 1960s and 1970s and began to qualify for Social Security benefits in 2008. By 2031, the youngest Boomers will have passed Social Security's full retirement age of 67 for people born in 1960 or later. By then, there will be 75 million Americans over the age of 65—up from 39 million in 2008.
The generation's size matters less than its long life expectancy when it comes to worries that Baby Boomers may tip Social Security into insolvency. In 1935, when Social Security began, people aged 65 could expect to live an additional 12.5 years. Currently, women age 65 can expect to live another 21.8 years, and men an additional 19.2 years.
Let’s look at the facts to see where Social Security is headed in terms of its finances.
- Baby Boomers were born between 1946 and 1964 and are now retiring and receiving Social Security benefits.
- The Social Security program is funded with contributions made by individual workers and their employers and by self-employed individuals.
- There are 2.8 workers for every Social Security beneficiary and will drop to only 2.3 workers for each beneficiary.
- The Social Security fund that pays retiree benefits will be depleted by 2034 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.
At the end of 2021, the trust funds paying Social Security benefits to retirees, their families, and disabled workers had approximately $2.85 trillion in accumulated reserves. There are two funds: The Old-Age and Survivors Insurance (OASI) Trust Fund and Federal Disability Insurance (DI) Trust Fund, often grouped together as OASDI.
The funds receive Social Security payroll taxes assessed at a 12.4% rate on earned income up to an annual income cap set at $147,000 in 2022 and $160,200 in 2023. This tax rate is split evenly between the worker and the employer. Self-employed individuals are responsible for paying the entire 12.4% but may deduct the employer's portion as a business expense on their income tax return.
When Social Security's Main Trust Fund Will Be Depleted
Benefit payouts have long grown faster than receipts. In 2021, spending exceeded income on an annual basis for the first time in decades. The 2022 deficit is expected to be slightly smaller, but Social Security trustees project annual shortfalls expanding rapidly thereafter until the OASI trust fund exhausts its reserves in 2034. At that point, ongoing payroll tax receipts are expected to cover 77% of scheduled benefits.
The good news is that OASI is now projected to run out of money a year later than the forecast in the 2021 trustees report because the recovery from the 2020 recession has been stronger than previously expected.
The even better news is that the DI Trust Fund, which pays disability benefits, is now projected to have sufficient reserves for at least the next 75 years instead of running out in 2057, as projected in the 2021 report. Disability claims have declined in recent years, a trend that continued in 2021 and forced the trustees to revise their projections.
Why the Fund Is Headed for Depletion
The problem is demographics. The ratio of Social Security beneficiaries to workers who pay into the system is shifting, from 2.8 workers for each beneficiary in 2022 to a projected 2.3 by 2035. Social Security taxes accounted for over 90% of the trust funds' income in 2021, so it's easy to see how this change is straining the system. The remainder of the system's funding came from interest earnings and receipts from the income tax on Social Security benefits.
Will Social Security go bankrupt when its main trust fund runs out of reserves? In a word, no. As long as workers are paying payroll taxes, there will be money to pay at least some of the scheduled benefits. However, once the reserves are gone, the payouts will be less than the current benefit amounts. And the reserves are highly likely to run out in a little more than a decade unless Congress acts to replenish the trust funds.
The Potential Solutions
There's cause for concern since the depletion date is fast approaching, and a reduction in benefits would be catastrophic for many of the neediest recipients. However, this issue hasn't exactly snuck up on Congress.
Since the beginning of 2016, the Social Security Administration's (SSA) Office of Chief Actuary has produced estimates and analyses for no fewer than 61 legislative proposals for reforming Social Security. It also estimates the effect of changing particular provisions of the program. Here are three hypothetical solutions for the funding shortfall.
- Raise the retirement age. The age of eligibility for full Social Security benefits is 67 for those born in 1960 and later. Some argue that it should be raised to 69 or 70 to match the increase in life expectancy since Social Security began. Gradually increasing the full retirement age to 69 in increments of three months per year starting with those turning 62 in 2023 and the age at which the maximum delayed retirement credits are earned from 70 to 72 would reduce Social Security's long-term funding shortfall by 28%, according to the SSA.
- Increase the payroll tax rate to 16%. This would involve raising the Social Security tax rate for employees and employers to 8% each from the current 6.2%. That would eliminate the entirety of the long-term funding shortfall, though annual deficits would return by 2037.
- Raise or eliminate the payroll tax cap. The annual employment income on which Social Security taxes must be paid is capped at $147,000 in 2022 and $160,200 in 2023. This cap is adjusted for inflation every year. Completely eliminating the payroll tax cap without a corresponding increase in benefits for those who exceed it would cut the projected 75-year deficit by 73%. The remainder of the shortfall could then be addressed by increasing the payroll tax rate by 1 percentage point to 13.36%, or 6.68% each for employees and employers.
The Bottom Line
While the aging of the Baby Boomer 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 mostly covered by the continuing receipts of 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 future benefits curtailed in a bipartisan compromise. Already perhaps the most popular government program in U.S. history, Social Security is sure to draw additional support from its projected record numbers of beneficiaries in the coming years. Congress will have every incentive to act before they suffer sizable and permanent benefits cuts.