Americans Are Living Longer, but Social Security Is Not Catching Up
Social Security is in trouble, but it isn't going broke. Based on its structure, it's impossible for it to go bankrupt. Instead, Social Security is an ongoing wealth transfer that has a growing age problem and a demographic problem.
To understand the impact of an aging population on Social Security, it's necessary to understand how the system works and how it divvies up payments.Social Security Is Not a Retirement Program
The popular narrative surrounding Social Security – indeed, the very language the program was sold on in the 1930s – is patently false. Social Security is not a retirement program or an insurance scheme for retired workers, despite how politicians represent it. Social Security is an active, year-over-year wealth transfer program from current workers to current retirees. There is very little real relationship between the amount of money an individual pays in and the amount of money he will eventually receive.
It's not a pension fund into which a worker puts earnings until he is elderly. Unlike a real retirement program, such as a 401(k) or a private pension in which each saved dollar is invested and made available again to the same worker later in life, Social Security is the umbrella title for two separate government policies.
The first policy is a tax on worker's earnings. Superficially, workers pay 6.2% of their income in Social Security taxes (FICA taxes), and their employers are supposed to match with a 6.2% tax. Economically, however, the employee bears the entire 12.4%, since the employer must reduce the wages and benefits to the employee by at least 6.2% to compensate for the taxes it pays.
The second policy is, for lack of a better term, a welfare payment for the elderly. Unlike other welfare programs, which are means-tested, Social Security does not take into consideration the income or wealth of its recipients; it only considers their ages and their respective time spent working in covered industries.
This creates a scenario with a simple ledger. In the first column are the total taxes paid in by current workers. The second column is made up of the total welfare distributions to qualified recipients. The so-called Social Security reserve is not a reserve at all; it is an account at the U.S. Treasury that holds surplus taxes from the first column, should any exist. It is presently filled with IOUs, since the federal government raids the reserve to pay for other programs each year.An Age Problem
Americans are living longer, which creates some uncomfortable accounting realities for the present Social Security system.
Social Security was signed into law in 1935. According to the Social Security Administration (SSA), an American male born in 1930 was expected to live to be 58 and an American female was expected to live to 62. So when FDR and the Congress set the official retirement age at 65, fewer than half of all Americans were expected to ever collect a single Social Security check.
According to the U.S. Centers for Disease Control and Prevention (CDC), the average life expectancy for an American in 2015 was 78.8 years, and those surviving to age 65 could expect to live an additional 17 years (males) to 21 years (females).
This means that the second column in the Social Security ledger – those receiving the welfare payments – doesn't shrink as quickly as it used to. In fact, due to demographic pressures, the number of recipients grows every year.A Demographic Problem
U.S. Census data shows that there were only 9 million Americans aged 65 or older by 1940. Seventy years later, the Census Bureau reported more than 40.3 million people aged 65 and older.
According to a study by the Mercatus Center, there were only 2.9 current workers paying FICA taxes to support every Social Security recipient in 2010. That compares to 16.5 FICA-paying workers for every recipient in 1950. Retirees are living longer and receiving more checks, but there are far fewer taxpayers to support each of them.
Mercatus found that the system is stable, given 2012 benefits, "when there were more than 3 workers per beneficiary." Wealth transfers are only sustainable when there are at least enough dollars coming into the program to support outlays. Soon – perhaps as early as 2030 – this won't be the case.