Graying of America will put pressure on Social Security reform

Investment News readers and audiences who attend my Social Security seminars around the country frequently ask me when I think Congress will tackle Social Security reform. I joke that my crystal ball looks more like a blurry snow globe when it comes to predicting exactly when Congress will act, but I am sure it will happen before the Social Security trust funds are expected to run dry in 2034.

The Old Age, Survivors and Disability trust funds were established as part of the Social Security reform legislation of 1983 as an accounting mechanism to keep track of surplus payroll tax revenues, the earnings on those assets and the interest that the federal government pays for money it borrows from the trust funds.

The government first tapped the trust funds in 2010 to help pay for Social Security benefits when payroll tax revenue alone was not sufficient. It has been drawing down those surplus funds ever since.

If Congress does not act before the trust funds are exhausted in 2034, there would be sufficient payroll tax revenue to pay only 77% of promised Social Security benefits — and nobody would be satisfied with that.

But here’s a new statistic that may be a better predictor of what might motivate lawmakers to take steps to shore up the long-term finances of the nation’s retirement program: By 2030, all baby boomers will be older than 65, meaning one in every five U.S. residents will be retirement age. Seniors will make up 21% of the population by then, up from 15% today.

By 2035, the nation will reach another demographic milestone: Older adults will outnumber children for the first time in U.S. history, according to the Census Bureau’s newly released 2017 National Population Projections. By 2035, there will be 78 million people 65 years and older compared to 76.4 million under the age of 18.

As the population ages, the ratio of older adults to working-age adults, known as the old-age dependency ratio, is projected to rise. Social Security is a pay-as-you-go system, which means that the payroll taxes paid by today’s 173 million workers and their employers fund the benefits of today’s 62 million retired and disabled workers, their dependents and survivors.

When Social Security was established in 1935, many paid into the program but few received benefits, so the revenue collected greatly exceeded the benefits being paid out.

“Between 1945 and 1965, the decline in worker-to-beneficiary ratios went from 41 to four workers per beneficiary,” Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University, noted in her report on how many workers it takes to support one retiree. “The Social Security program matured in the 1960s, when Americans were consistently having fewer children, living longer, and earning wages at a slower rate than the rate of growth in the number of retirees.”

Since 1975, the worker-to-retiree ratio has hovered between 3 and 3.4%, according to the Social Security Administration. It dropped below 3% for the first time in 2010. By 2060, the Census Bureau predicts the ratio will fall to just 2½ working age adults for every person eligible for Social Security.

“By 2060, nearly one in four Americans will be 65 years and older, the number of 85-plus will triple and the country will add half a million centenarians,” Jonathan Vespa, a demographer with the U.S. Census Bureau, wrote in his report.

Older women will continue to outnumber older men, but the gap is narrowing. As life expectancy for men continue to rise, it has implications for later-life support and caregiving since it affects the availability of partners and the likelihood of forming new relationships among the widowed or divorced, particularly at older ages, the Census report said.

“With this swelling number of older adults, the country could see greater demands for healthcare, in-home caregiving and assisted living facilities,” Mr. Vespa said in a statement accompanying the new report. “It could also affect Social Security.”

For the past several years, the Social Security trustees have used their annual report to urge Congress to act on needed reform legislation.

“The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them,” they wrote in the 2017 report. “Implementing changes sooner rather than later would allow more generations to share in the needed revenue increases or reductions in scheduled benefits and could preserve more trust fund reserves to help finance future benefits.”

If you want to look at some of the proposals to improve Social Security’s long-term solvency and potential implications, check out this list compiled by the office of the chief actuary of the Social Security Administration.

(More: Social Security budget cuts lead to declining customer service)