Boomer Blame, part 3

Two of last three posts have dealt with the baby boom and subsequent generations. This is the third and last intended installment in my blog series on Boomer Blame. Baby boomers, as noted in a prior post, are those having been born from 1946 through 1964. The two prior posts in the Boomer Blame series dealt with issues of demographics and then of the relationship of demographics to economic growth. This final post will deal with the Social Security, and the problem it faces in the not too distant future.

Social Security card

Social security dates back to 1935 and it pays benefits from the reserves in an account formally known as Old Age Survivor’s Insurance Trust Fund. (OASI). There also exists, since 1957 a Disability Insurance Trust Fund, and while separate funds, they “are managed under parallel procedures.” (Pattison, David; p. 2 Social Security Bulletin, v 75, No. 1, 2015). Today they are generally referred together as the Old Age, Survivors, and Disability Insurance Trust Funds (OASDI). I think the long name is self-explanatory as to purpose. Yet, these funds are more complicated than being in a simple trust fund. The Treasury uses the trust fund money that is deposited to reduce its it overall borrowing for other operations. Basically, the receipts are loaned to the government. This is one problem. Another problem is related to demographics. Us baby boomers are starting to retire and some have started to draw on social security. The first boomers started to reach age 65 five years ago. The boomer generation is so large that it is not just the withdrawals that affect the funds, but also the fact that less high level wage earners contribute.

One idea of how it works

The trust funds receive income from two main sources—tax income, think of the FICA deduction in your paycheck, and the other is interest earnings on the revenue reserve. Think about it, the main high earning years are said to be between ages 45 to 54, so it is only two years before the full boomer cohort will have moved beyond their peak earning years. The bulk of the boomer generation has already moved beyond their peak earning years. These are the rough numbers, but of course every individual situation is different, some may see their peak earning years last longer. One website indicates that 77% of all financial assets in the nation are held by persons age 50 or older. Millennials may now be dominating cultural trends, but from a financial asset standpoint older generations still control. In any event, while the 45-54 age group may be in their peak earning years, Dent and others point out that age cohort (particularly the first five years) spends the most. It is at that age that housing is up-sized, they have children in their teen years or beyond,  with college expenses.  In general peak purchase years. Therefore, while incomes, according to the general trend may be lower for those in 55-64, I suspect before retirement the group sees some clear saving years. Although hopefully they started saving for retirement years earlier. Social security has already been affected by these changes.

Ponzi Scheme?

In 2005/2006 Reznick, et al authored a paper (Social Security Bulletin V. 64, No. 4, 2005/2006) that indicated the trust fund would be exhausted in 2040. However, the more recent paper, ten years later that is quoted above indicates that date to now be 2033. So much for projections. (One thought for the dramatic change is that the Obama Administration approved the inclusion of many unemployed onto disability as a way to increase spending during the great recession.) Some policies of the agency also work to increase insolvency. At this rate the fund may be near broke by the time they figure it out. The math is just simply not sustainable. This can be seen by the dependency ratio which has continued to increase. The dependency ratio is a measure which shows the number of dependents, those aged zero to 14 and over the age of 65, to the total population. For example, the ratio was 67 in 2010, but will increase to 83 to 85 between 2030 and 2050. There are fewer and fewer workers to support those on social security or younger children in their own families. The Reznick study notes that the problem is not only that people are living longer, but they are also persons are having fewer children. They go on to say that this “demographic challenge has been recognized by policy analysts as well as policy makers. President George W Bush gave a succinct summary of the situation in his 2005 State of the Union address.

What does the future hold?

Major changes to Social Security, while necessary for the health of the system, are simply politically unpopular. Just as the NFL Players Association looks out for the veteran players, AARP looks out for those already retired. By the time Social Security faces crunch time, it will be too late to act. In the meantime the mischief's of faction continue to hold up the advancement of equitable policies to make sure that those who put in to Social Security will reap the benefit. Over one-third of persons who will look to retire will pretty much be fully dependent on social security. In addition, the web site Statistic Brain indicates that the average net worth of a couple age 55-64 is (January 2016 report) is just under $46,000. Not much in savings.  Americans are thought of as spenders and this may show come their intended retirement.  Many companies no longer have pension funds, or retirement accounts, hence an employee is often on their own, and many lack the control necessary to save for a rainy day, much less retirement. Social Security is in a perfect storm with an increase in retirees, people living longer, fewer children being born, retirement planning left to the individual, and factional groups that look out for short term interests.

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