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Debunking the impending Social Security "crisis"

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Based on current Social Security office projections, my 28-year-old son will be able to collect Social Security benefits for the rest of his life when he retires in 2040.

What’s that, you say? You thought Social Security was going to be bankrupt by 2040? Not at all. According to even the most pessimistic projections, Social Security will still be around in 2040.

What about the facts that people are living longer, that there will be only two-point-something workers per retiree and the impending crush of baby boomer retirements – the reasons the media and doomsayers give for the upcoming Social Security crisis? All of these events were predicted and included in the original 1983 projections. In fact, the only real surprise is that these predictions were too pessimistic.

Back in 1980, the U.S. Census Bureau said the population would grow an additional 16.9 percent by the year 2000, well below the 26.3 percent growth of the previous 20 years. The main reason for the projected slower growth was falling fertility trends.

But fertility didn’t continue to fall – it reversed, and legal immigration rose. The result was the population increased by 24.2 percent between 1980 and 2000, some 43 percent faster than the government had predicted. As a result, this year our nation’s population hit 301 million, a number we weren’t supposed to hit until 2020. Thus there are millions upon millions more Social Security-contributing workers around today than were predicted.

Although the estimators were too pessimistic on the number of workers paying for future benefits, they were too optimistic on some other factors. Social Security underestimated the number of disability claims it would be paying out. More importantly, real wage growth has not occurred as expected, with most worker wages remaining stagnant and only the top wage earners gaining ground over the last quarter century.

Indeed, the biggest problem was that wages (and the Social Security contribution base) were expected to grow at 1.5 percent a year in real terms, but grew at a rate closer to 1.1 percent a year. At a revised rate of 1.1 percent growth, there is indeed a problem and Social Security starts to have payout concerns around 2040. As a result, if nothing is done, my son will only be able to collect 70 percent of the cost-of-living enhanced income that is available to today’s 62-year-old retiree.

What would it take to fix the problem? In the 2005 Social Security Administration Trustees’ report, the Trustees explained that a 1.92 percent increase in the payroll tax supporting Social Security (currently set at 12.4 percent) would make the system actuarially solvent until 2080. So, if we bumped up employee and employer contributions by 1 percent, not only would my son be able to enjoy 100 percent of his projected benefits for his lifetime, but my 1-year-old grandson could also be receiving Social Security at retirement (by the way, the shortfall has actually improved a bit since the 1990s).

And it may not take 1 percent from each side. If the earnings cap on wages subject to Social Security taxes were removed, the resultant revenue would mean employers and employees would only need to kick in an additional 0.5 percent a year. And if real wage growth improves above 1.1 percent, the additional contribution needed to make Social Security healthy would be even less.

Baby boomers and those already retired will receive their full Social Security benefits, even if nothing is done. However, if the system isn’t tweaked, the following generation could receive less than their fair share based on what their parents got.