June 26, 2018 — One of the pillars of Social Security funding is that each working generation pays the retirement benefits of those whose working years are over. A key assumption is that there will be plenty of working age people paying into the system to pay those benefits. Unfortunately, the ratio of working age adults to those on Social Security is going in the wrong direction. Back in 1980 there were 19 U.S. adults age 65 and over for every 100 Americans of working age. Thirty years later, that old-age dependency ratio had hardly changed; it was 21 retiree-aged Americans per 100 workers in 2010.
Declining birth rates since 1970 and the retirements of millions of baby boomer have changed that equilibrium – fast. The retirement segment to working population ratio was 25 to 100 last year, in 2017. By 2030 the Census Bureau projects that the ratio will soar to 35, and might even get to 42 by 2060.
Think it’s bad here – look overseas
The USA is not the only country with a rapidly aging population. Things are far worse in countries with very low fertility rates and limited immigration, according to the Census Bureau. By 2025 for example, when the U.S. ratio will be 33, Canada’s will be 40, Germany’s 44, and in Japan, 58. By contrast, the ratio will only be 13 in youthful Mexico.
Affects on the Social Security System
Reserves built over time can help buffer highs and lows. For example, Social Security built up substantial reserves during boomers’ working years. Unfortunately, as 10,000 boomers turn 65 every day, the system is now going into deficit mode; this year for the first time more is going out in benefits than coming in on a cash basis. The Trustees’ 2018 estimates are that reserves will be exhausted for the retirement portion of the system (OASI) by 2034, while the disability portion (DI) will run out by 2032 (good news for DI, that is 4 years later than projected in 2017). When the reserves are gone the system will only be able to pay a portion of promised benefits, unless something else happens.
State pension funds in trouble too
According to data by the Pew Charitable Trusts, state pension funds also face substantial shortfalls. That is bad news for anyone expecting a state pension, or who will have to pay taxes to meet those obligations. Pew projects that states only had $2.6 trillion in assets versus liabilities of $4 trillion in fiscal 2016.
More from SS Trustees
(The information below is reprinted from Social Security’s “Summary: Actuarial Status of the Social Security Trust Funds” – June, 2018)
Beneficiaries and Benefit Payments
At the end of 2017, the Social Security program was providing monthly benefits to about 62 million people: 51 million from the OASI Trust Fund and 10 million from the DI Trust Fund. Total benefit payments for the year (excluding payments to the Railroad Retirement Board) were $941 billion: $799 billion from the OASI Trust Fund and $143 billion from the DI Trust Fund.
Sources of Trust Fund Income
During 2017, an estimated 174 million workers had earnings covered by Social Security. Employees pay a 6.2 percent contribution from earnings up to a maximum of $128,400 in 2018, which their employers match. Self-employed workers pay both shares of the contribution, or 12.4 percent. More than 40 percent of current beneficiaries pay income taxes on part of their benefits, and those taxes go to the OASDI Trust Funds and Medicare’s Hospital Insurance Trust Fund. The trust funds also earn interest ($85 billion in 2017 for the OASDI Trust Funds) on their accumulated reserves.
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