Social Security solvency challenges from baby boomer retirement

Baby Boomers Retirement Obstacles

The Impact of the Pending Retirement of the Baby Boomers

During the period from 1946 to 1964 approximately 4 million people were born each year. This has been the greatest surge in births of any period prior or since. In 2006 the first baby boomers turned 60 and began settling into early retirement. In 2011 the first of them turned 65, the traditional retirement age. The retirement of this generation means fewer workers will be paying taxes. The problem is that each year, to cover expenditures, government loans money to itself in the form of Government Account Securities. These funds come from the Social Security Trust Fund. As the baby boomers retire and begin to collect Social Security, funds from the general fund will be required to make-up the difference between what is collected in payroll taxes and what is drawn down. This will significantly reduce resources available for other programs. In order to meet their financial obligations the government will have to cut programs, raise taxes, lower benefits, or institute a combination thereof (Pakko, 2006), otherwise Medicare and Medicaid as well as Social Security will soon be unable to deliver on their promises.

Social Security

Social Security is the United States Government's retirement income program. It covers almost all workers excluding most Federal, state and local Government workers who are not covered since they have their own pension system. It is the primary source of retirement income for about two-thirds of American retirees. The other third either have a defined benefit or a defined contribution plan that the retiree contributed to while working.

Social security has a solvency problem due to the gap between smaller younger generations and a very large baby boom generation. The number of workers per retiree is set to decline from about 3.2 workers per retiree now to about 2 workers per retiree by 2030 (Kubarych, 2004). The retirement of the baby-boom generation will put exceptional strain on the current system, which is mainly a pay-as-you-go system. (This means the current payroll taxes paid by workers and their employers on their behalf go to meeting current liabilities of the Social Security system, rather than building up assets which can be used in the future to pay benefits.) the question, according to Carson, Wade and Hecht (2005, p. 158), is how and what recourses can be provided for sustaining the increasing proportion of the society that, by virtue of age or disability, no longer contributes to national income?

One solution to this problem may be to adjust the way benefits are issued. Since Social Security began life expectancy has increased and is expected to continue increasing. As Americans continue to live longer and are in better health at older ages, it makes sense to ask people to work longer to claim full benefits. A reduction in the annual cost of living adjustment (COLA) would also save money. Supporters of this idea maintain that the annual COLA is too high and based on a formula that overstates inflation. Another tactic could be to reduce benefits by 5% for future retirees. Supporters of this idea claim that fixing Social Security is the responsibility of all beneficiaries and everyone should be part of the solution. Savings could also be realized by implementing progressive indexing to reduce benefits for future retirees. This would preserve Social Security's safety net for those who need it the most. Though this makes benefits grow more slowly for middle and high income retirees they often have other sources of income. Many contend this is an equitable solution that causes minimal pain (Kubarych, 2004).

A second approach to this problem would be to increase revenues. One way to accomplish this would be to increase payroll tax for both workers and employers. Many feel a modest tax hike is a small price to pay for a strong Social Security system. This could also be done by increasing the earnings cap on wages subject to Social Security tax. This would affect high income workers who can best afford to pay more taxes. Also, Social Security benefits could be taxed like pension benefits. This would simplify tax rules and not affect low income pensioners. Another proposal would be to include new state and local government workers in the system (Kubarych, 2004).

Discussion

How all of this will affect the economy and baby boomers retirement plans is extremely hard to predict since the current systems of health care and Social Security are fundamentally flawed in and of themselves. The strain of a greater number of retiring and aging citizens on an economic system that is currently in a very tenuous condition could be catastrophic for the future working class generations who are going to have to somehow keep the economy propped up on increasingly shaky legs.

Solutions to this problem are not simple. If left unaddressed one day soon Americans may be faced with the choice of paying retirement benefits to their parents or paying for programs that help their own children. That future is coming, and no amount of wishful thinking will change that. As Carson, Wade, and Hecht (2005) point out America is aging quickly and the support of our elderly will lay an increasing claim upon our national output (p. 159). At this point a combination of these solutions seems the best bet to resolve these obstacles. Just what that combination is going to be remains to be seen.