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’s a lot of talk about whether the baby boomer generation will bankrupt Social Security. It's not just the size of this generation that's a concern; it's their life expectancy. In 1935, when Social Security started, people who reached 65 could expect to live an additional 12.5 years. Now, women who turn 65 can expect to live another 21.5 years, while for men, life expectancy at 65 is 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 starting to receive Social Security benefits.
- Currently, there are 2.8 workers for every Social Security beneficiary, but by 2035, the balance will shift, with only 2.3 workers for each beneficiary.
- Although the Social Security trust fund that supports Social Security retiree benefits could be depleted by 2034 if no changes are made, the system won't go bankrupt thanks to all the workers paying taxes.
- Some combination of raising payroll taxes and cutting benefits—by raising the full retirement age, for example—could be used to shore up the system.
Currently, there is a large Social Security surplus—at the beginning of 2020, there was almost $2.9 trillion in the trust funds that cover retirees and those with disabilities (there are two funds, together known as OASDI). But according to the 2020 Annual Report of the Board of Trustees, which oversees the Federal Old-Age and Survivors Insurance (OASI) and Federal Disability Insurance (DI) trust funds, the OASI, which covers retiree benefits, is projected to run out of money in 2034.
The problem is demographics: The ratio of Social Security beneficiaries to workers who pay into the system is shifting—in 2019, there were 2.8 workers for each beneficiary, but in 2035 the number of workers per beneficiary is expected to drop to 2.2. About three-quarters of the funding for retirees and disabled workers comes from Social Security taxes that current workers pay, so it's easy to see how this change is straining the system. The remaining one-quarter of the system's funding comes from the trust funds.
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. But once the reserves are gone in 2034, only an estimated 76% of expected Social Security benefits will continue to be paid from the government’s tax revenues.
The Potential Solutions
Clearly, there's cause for concern. A reduction in benefits is not ideal, and 2034 is only 14 years away. But this is not a "surprise" issue. Since Feb. 1, 2016, there have been 45 proposals reported by the Social Security Administration currently in various stages of review by the U.S. government. Here are three ideas that have been proposed:
- Raise the full retirement age for Social Security benefits. Full retirement age is already scheduled to rise during the coming years to age 67 for those born in 1960 and later. Some are arguing that it should be 69 or 70, given how lifespans have expanded since Social Security was initiated.
- 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 $137,700 in 2020 and is adjusted for inflation every year. Completely eliminating the payroll tax cap could cut the projected 75-year deficit in half.
The 2020 analysis of the Social Security trust funds' financial health doesn't reflect the potential effects of the COVID-19 pandemic.
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 demise of the system. 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 and 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.