Personal Finance

Turns out it's not baby boomers who have taken the most from Social Security

Key Points
  • With 10,000 baby boomers turning 65 every day, many believe the sheer size of that generation is putting undue pressure on Social Security's funds.
  • But it turns out that the earliest beneficiaries, from back when the program was created in the 1930s, were actually the ones who received more money than they paid in.
  • Policy changes made around that time contributed to the missing reserves that program faces today. To fix that, it will require tax increases, according to the Center for Retirement Research at Boston College.

You've probably heard before that baby boomers are to blame for Social Security's money woes.

Yet new research from the Center for Retirement Research at Boston College suggests otherwise.

Tom Merton | Getty Images

The thinking typically goes that boomers have put undue pressure on the system because of the size of their generation.

About 10,000 people turn 65 every day. Many of those individuals are claiming Social Security retirement benefits, which has created the perception that they are draining the system.

However, the Center for Retirement Research found the boomer cohort born between 1946 and 1964 will actually have paid more into the system than they will receive in benefits.

How to plan for a Social Security shortfall
How to plan for a Social Security shortfall

There is a group of retirees, however, who did receive more money than they contributed: people who lived through the Great Depression of the 1930s. That's because they generally worked for fewer years before collecting benefits.

And the policy decisions that were made in the early years of the program, namely to make it a pay-as-you-go system, helped set it up for the funding problems we face today, the research found.

"Whenever you have a pay-as-you-go system, it's going to be more expensive than a fully funded system," said Geoff Sanzenbacher, associate director of research at the Center for Retirement Research.

'Missing trust fund'

Social Security has made headlines for the funding shortfall it could face if nothing is done to change the system.

The latest report from the Social Security Board of Trustees projects the system's trust funds will be depleted in 2035. At that point, only 80% of expected benefits will be payable.

At its inception in 1935, Social Security resembled a private insurance plan, where the funds coming closely matched the contributions and benefits for the different age cohorts.

Social Security costs will exceed income by 2020
Social Security costs will exceed income by 2020

But that was changed with amendments that were made in 1939 adding benefits for spouses and minor children of retired workers, as well as survivor benefits for families if a worker died. At that time, benefits were tied to average earnings.

Those changes meant that some retirees received more in benefits than they had contributed to the system. Payroll tax receipts were used to make those payments.

However, that prevented the system from expanding the trust fund. Without those increasing reserves, the system also misses out on interest the money could be earning.

The "Missing Trust Fund," as it is named in the research, makes the program more expensive for current participants, because they have to contribute money both for their benefits and to make up for those missing funds.

As it stands, today's benefits are roughly in line with costs, and consequently are not too generous, Sanzenbacher said. "But we need to deal with this legacy debt," he said.

Possible solutions

There are a couple of approaches that could be used to make up the shortfall, according to the research.

One way would be to raise taxes. Any increase would need to be permanent, according to the research.

Another possible solution would be to increase taxes temporarily until a sufficient trust fund is established. Once that money is there, the system could return to today's level of payroll taxes. The current Social Security tax rate is 12.4%, which is evenly split between employers and employees.

The tax increases could come in several forms: by increasing the payroll tax percentage and maintaining the current Social Security cap of $132,900; increasing the payroll tax and eliminating the payroll tax cap; or shifting from a payroll tax to income tax.

More from Personal Finance:
Bill could extend Social Security's solvency for rest of century
Rolling Stones concertgoers schooled on lifetime income
Part-time work and retirees' portfolios, Social Security and Medicare

Small tax raises could be used to supplement interest the trust fund hasn't been earning as it is being depleted, while larger increases could help replace the trust fund itself.

"There are different ways to deal with this issue," Sanzenbacher said.

That will require considering whether to put the burden on current generations, future generations or something in between, he said.

"We're going to have to do something," Sanzenbacher said. "We're not trying to propose whatever it is we do.

"We're just trying to make the point that you can make different choices."