Slowing Growth And Increasing Median Age Set the Stage for a Social Security Crisis
When you boil it all down, the social security crisis has transparent causes. It’s about simple economics. There’s not enough taxation money to pay for the benefits promised to a graying generation. There’s only so much in taxes American worker bees can yield. Declining returns commence if overtaxation is imposed. It’s a problem the government must address before it becomes more severe.
U.S. economic growth has been declining for decades. It ceased keeping pace with the growth rate of benefits years ago. As we can see from the chart below, each successive business cycle expansion is less robust. This means government revenues in the form of taxation aren’t growing very rapidly. Some economists estimate social security costs are rising at double the rate of median economic growth in the 21st century.
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The factors affecting social security benefits go beyond revenue generation. Even if benefits are maintained, retirees have no ability to offset against rising inflation. The new-normal low-rate environment makes earning a yield on savings near-impossible. The golden years are a time to withdraw investment income from the stock market and transfer it to safer investment vehicles. These include Guaranteed Investment Certificates (GICs) and “high yield” savings accounts. The problem is, these vehicles barely pay out a yield.
Also Read: U.S. Economic Outlook 2017: Trigger Event Could Rock U.S. Economy
What Year Will Social Security Run Out?
The U.S. Treasury predicts social security funds will run out in 17 years (2034), if the problem isn’t addressed. Funds from the Depression-era program will be exhausted by then, unless current policy changes. (Source: “US Social Security funds run out in 17 years: Treasury,” Phys.org, July 13, 2017.)
There are two main ways to alter this reality. The most desirable way is to increase economic growth. This would generate more tax receipts for Uncle Sam, which could be diverted to shore up social security. The government would need to resist the temptation to divert funds elsewhere. But otherwise, it’s entirely doable with some bureaucratic will and oversight.
The second, less desirable way is through reduction of benefits. Obviously, this would cause economic hardship to a class with little ability to substitute income. However, the government may have no choice but to hatchet benefits if long-term growth doesn’t return to historic norms.
With the peaking of the current business cycle and simultaneous credit and stock market bubbles, booming growth isn’t returning anytime soon. The administration will need to make do with the revenue it has.
Aging Population & Slow Economic Growth Contributing to the Coming Social Security Crisis
According to the U.S. Treasury, about 50 million Americans receive retirement benefits annually. With a steady stream of baby boomers retiring, beneficiaries are increasing by over a million each year. (Source: Ibid.)
A slowdown in baby boomer recipients isn’t expected to happen anytime soon. There are still 13 years to go before the last of this generation turns 65 (1946-1964). This will only exacerbate the deficit of social security systems until serious measures are taken to control it.
