Will Baby Boomers Bankrupt Social Security?

Rob Reuteman,|Special to CNBC.com

As the record federal budget deficit draws increasing scrutiny from Washington to Wall Street to Main Street, deficit hawks may take aim at entitlement programs including Social Security.

Jonathan D. Colman

And, the nearly 80 million Baby Boomers phasing into retirement will set in motion a dynamic that—if not addressed by Congress—could result in the next generation getting fewer benefits.

However, despite fears that Boomers will trigger a collapse of Social Security, experts say the system can and will survive for decades and generations to come.

Congress made significant fixes to Social Security during the 1970s, the 1980s and the 1990s, and there appears to be a slowly gathering political will to make it solvent for the next 75 years.

By 2017, Social Security is expected to start paying out more than it collects in payroll taxes, according to the 2009 Annual Report from the Social Security and Medicare Board of Trustees. There is currently a large surplus, but it will be drained by the year 2037. At that point, Social Security will only be able to pay out 75 percent of its benefits.

A separate report, done by the nonpartisan Congressional Budget Office, concludes much the same thing, but gives the system another 10 years before it begins to fall apart.

The trustees’ annual report “does not depict a program in crisis,” said Kathy Ruffing, of the Center for Budget and Policy Priorities. “Policymakers should act sooner rather than later to put the program on a sound long-run footing, but today’s beneficiaries and workers approaching retirement need not fear that their Social Security benefits are at risk.”

“Alarmists who claim that Social Security won’t be around when today’s young workers retire misunderstand or misrepresent the trustees’ projections,” she added.

Beginning the Boom

Looking back, the outlook was rosy for most Americans in 1946, the year earmarked as the beginning of the so-called “baby boom.” With World War II finally over, a 15-year stretch of bad times that had begun with the great Depression was finally over. They responded by having more babies than ever before, more than 78 million of them by 1964.

For Social Security, the mini-population explosion was both beneficial and problematic. Social Security is funded mostly through payroll taxes, with present-day workers funding the payouts for retirees. Since there have been so many Boomers in the workforce for so many years, there were a lot more people putting money into the system than taking it out.

As Boomers begin to retire, the huge group of people putting money into the system will begin taking it out of the system, which then will be funded by a generation of workers—the so-called Gen X—whose numbers are some 15 million fewer. The surplus of money paid into the system by Boomers will allow it to run into the late 2030s, even though it will begin paying out more than it takes in by 2017.

“We won’t have a crisis,” says Michael Astrue, commissioner of the Social Security Administration. “2037 is a long way off and there is no reason to panic, but this is a serious issue we need to resolve. Younger people tend to overreact.”

business check

Count Gen-Xer Tom Firey among those younger workers who think they’re getting the short end of the stick. The managing editor of the conservative Cato Institute magazine, Regulation, first wrote about the subject nearly 10 years ago in a column headlined, “Boomers Fleece Generation X with Social Security.”

“Ever since we Gen-X/Yers began working, we've paid 12.4 percent of our earnings to Social Security,” he wrote. “In contrast, the Boomers will get a bargain. When they entered the workforce in the late 1960s, they paid only 6.5 percent of their earnings to Social Security. Only from 1990 on, when the Boomers had earned paychecks for a quarter-century, did they start paying 12.4 percent to Social Security, the same percentage we Gen-X/Yers have paid our whole lives.”

That’s why Firey dubbed it The Boomers’ Bargain: “They've paid less of their earnings into Social Security than we Gen-X/Yers, yet they'll receive more in benefits than we will and we'll pick up the tab.”

As often comes with age, Firey has mellowed some in the past 10 years, even injecting dark humor into his outlook today. He says, "The last two generations gave themselves some additional retirement benefits just before they left the workforce. The World War II generation gave itself annual COLA (cost-of-living allowance) raises in 1975, and the boomers gave themselves the prescription drug benefit earlier this decade.”

“In essence, these generations said, ‘I'm not willing to pay for these new benefits for myself, but I'm happy to force my kids and grandkids to pay for these benefits for me,’ “Firey added.

“That's a lousy trick. Though to be fair, older generations don't realize that this is what they're doing,” Firey said. “What depresses me most is that my generation will probably turn around and do this to our children and grandchildren.”

Changes Over the Years

President Franklin D. Roosevelt, signing the original Social Security Act on August 14, 1935.
Source: socialsecurity.gov

Social Security will mark its 75th anniversary this August. Signed into law by President Franklin Roosevelt during the Great Depression, it is the country’s most successful anti-poverty program, offering retirement, disability and survivor benefits to 50 million people. Over the past 40 years, lawmakers have tinkered with the formula several times to address financial problems:

  • In 1972, Congress expanded benefits with the annual COLA adjustments.
  • In the 1983, President Reagan created the Greenspan Commission to study Social Security and make recommendations. Headed by soon-to-be Federal Reserve Chairman Alan Greenspan, the commission grappled with the growing demographic problem of Baby Boomers, the youngest of whom were then 19.

Projections already showed that the ratio of workers paying retirees’ benefits would plunge from 16 to 1 to 2 to 1 when the last boomers retire decades in the decades to come.

To eliminate that deficit, the commission suggested hiking the Social Security payroll tax, and lifting the retirement age to 67 by 2026. Congress promptly passed the legislation and Reagan signed it.

Workers can still collect Social Security retirement funds when they turn 62, but that is the “early retirement age,” and benefits are reduced by about 25 percent.

Predictions '10 - See Complete Coverage

The full retirement age now depends on when you were born. If you were born between 1943 and 1954, you receive full benefits if you retire at age 66. If you were born in 1960 or later, your full retirement age is 67. Some observers suggest the retirement age may need to be raised to age 70 if the system is to remain solvent.

  • In the 1990s, Congress raised taxes on benefits to the current 12.4 percent.

In his February 2005 State of the Union Address, President George W. Bush named strengthening Social Security as one of the priorities for his second term in office. He also called for a transition to a combination of a government-funded program and personal accounts ("individual accounts" or "private accounts") through partial privatization of the system.

This proved controversial and further Social Security reform has been blocked by the dispute over privatization. The recent turmoil in the financial markets exposed some of the problems that approach would pose, and privatization no longer appears to be on the table.

Solutions Elusive But Not Impossible

Mounting Debt, Debating Benefit Cuts

Last month (January 2010), a joint report from the National Research Council and the National Academy of Public Administration studied the growth in three major entitlement programs— Medicare, Medicaid, and Social Security. The report, "Choosing the Nation's Fiscal Future," was done by a committee that included three former heads of the Congressional Budget Office.


The report concluded that spending was outpacing tax revenue so much that "any efforts to rein in future deficits must entail either large increases in taxes to support these programs or major restraints on their growth – or some combination of the two."

"The debt level of the United States is unsustainable, something has to give," said Rudolph Penner, head of the CBO from 1983 to 1987 and co-chairman of the report.

“Given that no one in power is serious about restraining the deficit, we are rapidly heading toward a crisis,” Penner said. “If we should ever become rational, I think that the only solution involves a combination of tax increases and spending restraint.”

The U.S. Senate last month voted down a proposal to create a bipartisan commission that would have made recommendations by December on how to deal with rising deficits and the fiscal instability of Social Security, Medicare and Medicaid. Like the Greenspan Commission 27 years earlier, this one would have presented legislation to Congress in a yes-or-no vote, with no opportunity for amendment.

Many Republicans refused to back any move that could force them to vote on tax increases and many Democrats objected to the prospect of deep spending cuts. The bipartisan proposal was co-sponsored by Sen. Kent Conrad, (D) North Dakota, the chairman of the Budget Committee, and Sen. Judd Gregg of New Hampshire, the committee’s senior Republican.

Sen. Max Baucus, (D) Montana, the chairman of the Senate Finance Committee, said, “Their commission is a Social Security-cutting machine.”

This sort of proposal needed 60 votes for passage, and Conrad claimed to be “delighted” to have gotten 53 votes.

“I think that provides a significant boost to the momentum that is under way to begin to address the very deep challenge of a burgeoning debt,” he said, adding that the outcome was “yet another indication that Congress is more concerned with the next election than the next generation.”

President Barack Obama

In his State of the Union speech, President Obama said he would form such a panel by executive order. But his alternative panel could not force Congress to vote on its recommendations.

“Before too long we need to put political posturing aside and sit down at the table, as we did in 1983, to be bipartisan,” said Astrue, the Social Security commissioner appointed by George W. Bush in 2007 to a six-year term.

“My sense is that very few members of Congress have faced up to it in a hard way,” he added. “But I’m not writing off Congress. I try to be optimistic about these things. I continue to believe we’re going to have some very honorable people taking risks for the good of the country.”

Watch "Tom Brokaw Reports: Boomer$!", Thursday, March 4 at 9pm ET on CNBC. The program will also air Saturday, March 6 at 7pm ET; Sunday, March 7th at 9pm ET; and Monday, March 8th at 8pm ET.