Social Security is vital to the financial well-being of our nation’s retired workers, as well as millions of disabled workers and survivors of deceased workers.
The Center on Budget and Policy Priorities in April 2022 released a report which showed that nearly 22.5 million people are pulled out of poverty each year due to social security payments. Additionally, the poverty rate for American seniors is 9% due to the existence of Social Security, compared to an estimate of 38% without the program.
Yet, as surprising as this program has been for more than eight decades, social security is fraught with problems.
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Social Security has a couple of known and longstanding problems
The Social Security Board of Trustees’ latest annual report predicts that the Old-Age and Survivors Insurance Trust, which is what provides monthly benefits to retired workers and survivors, is running out of business reserves – income in excess accumulated since inception – by 2034. Although Social Security and the FBO run no risk of insolvency or bankruptcy, failure to correct this capital shortfall could result in an estimated 23% reduction in benefits over 12 years for retired workers and survivors.
Some of the shortcomings of social security are well known. For example, the continued retirement of baby boomers from the workforce is something lawmakers have known for decades that would negatively affect the program. As more boomers retire, the ratio of workers to beneficiaries has declined. In other words, there aren’t enough new workers to thwart boomers’ retirement.
Another social security problem that is well documented is the inability of the Cost of Living Adjustment (COLA) to keep up with the true inflation that seniors face.
Ideally, the inflationary link of social security, the consumer price index for urban wage earners and office workers (CPI-W), should help keep the purchasing power of social security dollars stable as the price rises. of goods and services. However, social security policy analyst Mary Johnson of The Senior Citizens League, a nonpartisan elders advocacy group, notes that the purchasing power of social security benefits has plummeted 40% since 2000.
As you will notice from the full name of the CPI-W, it is designed to track the spending habits of urban workers and office workers, many of whom are of working age and do not receive a monthly social security allowance. This is a problem, because most of the beneficiaries are elderly. Consequently, major costs for retirees tend to be underweighted in the COLA calculation, while less important costs receive additional weighting.
The two huge social security problems nobody talks about
But these well-known shortcomings represent only half the story of what concerns social security. There are two other major problems that play a key role in the projected social security liquidity shortage by 2034 – and hardly anyone talks about either problem.
1. Historically low birth rates
The first problem that has gone off the radar is the steadily falling birth rate in America. According to the Centers for Disease Control and Prevention, the fertility rate in the United States, which is an estimate of the average number of children a woman will have in her lifetime, must be 2.1 to replace exactly one generation. In 2020, the fertility rate in the United States hit an all-time low of about 1.6 expected births per woman. Birth rates have been falling sharply for over a decade.
The reason for this decline is complex and the result of a long list of plausible factors. We are seeing couples who wait longer to get married and have children. There has also been a decline in unwanted pregnancies, which may be a reflection of Americans having easier access to contraceptives.
The US economy could also be the cause. The Great Recession (2007-2009), the COVID-19 pandemic and the current technical “recession” have all weighed on consumers’ wallets and made them think twice about the additional costs of having children.
Historically low birth rates will add even more pressure to the already declining social security worker / beneficiary ratio. If there aren’t enough future workers to counter those retiring from the workforce, Social Security’s cash deficit could be even greater than the Board of Trustees’ current predictions.
2. A notable decline in legal immigration
The other social security problem that isn’t paid enough attention is the over two-decade decline in legal immigration to the United States.
Despite what you may have heard or read, immigration is 100% positive for Social Security. Most legal immigrants arriving in the United States tend to be younger, which means they will spend decades in the workforce, generating payroll tax revenues that support Social Security. In fact, the Social Security Board of Trustees is currently modeling an average of 1,281,000 legal immigrants entering the United States each year over the next 75 years.
Unfortunately, legal immigration to the United States has been steadily declining since the 1990s. While approximately 8.86 million legal immigrants in total entered the United States in the five-year period ending in the first half of 1997, only 4.77 million people legally entered the United States in the five-year period ending in the first half of 2017, according to the data. of the World Bank. It can only be assumed that the immigration picture was even more challenging during the COVID-19 pandemic.
If the decline in legal immigration and the decline in birth rates are not addressed relatively quickly, social security could face a severe shortage of money.
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