Previously, we saw that the Social Security trust fund is not actually funded, but rather a $2.6 trillion debt held in the form of Treasury Bills.
Now we will address the issue of demographics, and why that plays a critical role in the decisions made about this program in the future.
According the the House Ways and Means Committee, beginning in 2010, Social Security payments to beneficiaries were higher than taxes collected. Their projections for how much payments exceed taxes are:
2010 -$37 billion
2011 -$45 billion
2012 -$30 billion
2013 -$28 billion
2014 -$30 billion
2015 -$31 billion
2016 -$33 billion
2017 -$44 billion
2018 -$59 billion
2019 -$77 billion
2020 -$98 billion . . .
2033 -$464 billion
Many quote 2033 as the year when the program will be a "pay-as-you-go" program, but, as we have seen, that projection erroneously subtracts the projected shortfalls from Treasury Bills currently held. Now, of course, you know that those Treasury bills are an unfunded government debt.
Falling Birth Rates
The next problem lies in the demographics of our country. When Social Security started, it was just prior to the "baby boom" (1943 - 1960), and 159.4 workers supported each retiree. According the the Social Security Administration, the number of workers supporting each retiree are:
1950 - 5.1
1960 - 3.7
1970 - 3.2
1980 - 3.4
1990 - 3.4
2000 - 3.4
2010 - 2.9
2020 (projected) - 2.3
We have seen that there is no funded account from which these payments will be made, and from the information provided by the Social Security Administration, we see a clear decline in the relationship between the number of workers paying for each retiree. In 2033, when the program is projected to be pay-as-you-go, we can see the problem in real terms with the following two pieces of information.
- There will likely be only 2 workers for each retiree; and
- Current monthly Social Security benefits average $1,235.
The rate of inflation from 1973 - 1995 was 2.8%. We'll apply a lower rate, 2.5%, to the current $1,235 average monthly benefit. Using that lower annual inflation rate of 2.5% per year, in 2033, the average Social Security check will be $2,074.
In order for two workers to support one retiree's benefits of $2,074 in 2033, both workers and their employers must pay $6,223 per year into Social Security. At the current rate of 6.2% of payroll taxes, we will have to assume that the average worker will be earning $100,369 per year.
But, according to the Census Bureau, the median U.S. wage in 2011 was $50,054. Assuming that wages rise at 2.8% annually until 2033 (an optimistic assumption, since wages were 8% lower in 2011 than in 2007), the median wage will be $89,391. In order to support each retiree in 2033, then, payroll deduction for Social Security will have to be 6.96% for both workers and employers.
In other words, in 2033, workers will pay 7% into Social Security BEFORE they pay federal, state and local taxes. This may give you some insight into why young people are skeptical of ever receiving any benefits from this program.
But, as the infomercial pitch men say, wait! There's more.
Life Expectancies
When Social Security was introduced, the average U.S. life expectancy was 62 years, but benefits were not paid until age 65.
Look at life expectancy projections at age 65 for selected years:
1960 - 15.5
1980 - 16.9
2000 - 18
2005 - 18.3
2020 - 19.2
2040 - 20.4
So, not only must Social Security contributions increase in 2033 to 7%, but they must be paid for a much longer period of time.
Solutions
There are many ideas for strengthening the system. Some include:
- Increase Social Security taxes from 6.2% to 7.2%. This could be done on a gradual basis, i.e., "a nickel for every $100 of payroll, each year, for 20 years," as recommended by fellow Oregonian Dale Coberly, a retired engineer.
- Raise the retirement age.
- Increase the Social Security wage base above the current limit of $106,800.
- Subject benefits to "means testing," as recommended by investor Warren Buffett.
In the spirit of compromise, which certainly does not exist in our highly polarized political environment, a combination of these ideas seems most equitable. And, by effecting these ideas in a gradual way,
- Tax increases will be less onerous
- Retirement age increases will be more in line with increasing life expectancies.
Instead of rallying around political rhetoric, a rational approach to fixing this problem can be had by finding common ground and effecting gradual change that will not damage the slow, but steady recovery from our recent deep financial recession.
As always, I welcome your comments and questions.
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