The 2 Biggest Social Security Problems Nobody Talks About | Personal finance

(Sean Williams)

Social Security is essential to the financial well-being of our nation’s retirees, as well as millions of disabled workers and survivors of deceased workers.

The Center on Budget and Policy Priorities released a report in April 2022 that showed nearly 22.5 million people are lifted out of poverty each year through Social Security payments. Additionally, the poverty rate for older Americans sits at 9% due to the existence of Social Security, compared to about 38% without the program.

Yet, as amazing as this program has been for more than eight decades, Social Security is plagued with many problems.

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Social Security has some well-known and long-standing problems

The Social Security Board’s latest annual report predicts that the Old Age and Survivors Insurance Trust, which pays monthly benefits to retired workers and survivors, is on track to exhaust its reserves of assets – income surpluses accumulated since launch — by 2034. Although the Social Security and AVS are not at risk of insolvency or bankruptcy, failure to fill this capital shortfall could lead to a reduction in benefits for retirees and survivors of about 23% in 12 years.

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 would negatively affect the program. As more and more baby boomers retire, the worker-beneficiary ratio has declined. In other words, there are not enough new workers to counter the retirement of baby boomers.

Another problem with Social Security that is well documented is the inability of the cost of living adjustment (COLA) to keep up with the true inflation that older people face.

Ideally, Social Security’s inflationary link, the Consumer Price Index for Urban Wage and Clerical Workers (CPI-W), should help keep the purchasing power of Social Security dollars steady with rising prices of goods and services. However, Social Security policy analyst Mary Johnson of the Senior Citizens League, a nonpartisan seniors advocacy group, notes that the purchasing power of Social Security benefits has fallen 40% since 2000.

As you’ll notice by the CPI-W’s full name, it’s designed to track the spending habits of urban and office workers, many of whom are of working age and don’t receive monthly Social Security benefits. This is a problem, because most of the beneficiaries are elderly people. Therefore, significant retiree costs tend to be underweighted in the COLA calculation, while less significant expenses are given additional weight.

The Two Huge Social Security Problems Nobody Talks About

But these well-known shortcomings are only half the story of what’s troubling Social Security. There are two other big issues that play a key role in Social Security’s projected cash crunch by 2034 — and hardly anyone is talking about either issue.

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1. Historically low birth rate

The first problem that has gone unnoticed is the steadily declining birth rate in the United States. According to the Centers for Disease Control and Prevention, the US fertility rate – an estimate of the average number of babies a woman will have in her lifetime – needs to 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 plummeting for more than a decade.

The reason for this decline is complex and results from a long list of plausible factors. We see couples waiting longer to get married and have children. There has also been a decline in unintended pregnancies, which may reflect the fact that Americans have easier access to contraceptives.

Even the US economy could be to blame. 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 added costs of having children.

Historically low birth rates will add even more pressure to the already declining worker-to-beneficiary ratio of Social Security. If there aren’t enough future workers to counter those retiring from the labor force, Social Security’s cash crunch could be even bigger than the board’s current forecast.

2. A significant drop in legal immigration

The other social security problem that isn’t getting enough attention is the more than 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 coming to the United States tend to be younger, which means they will spend decades in the workforce, generating payroll tax revenue that supports 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 on a steady decline since the 1990s. While approximately 8.86 million total legal immigrants entered the United States during the five-year period ending in first half of 1997, only 4.77 million people entered the United States legally in the five-year period ending in the first half of 2017, according to World Bank data. One can only assume that the immigration picture has been even more difficult during the COVID-19 pandemic.

If the decline in legal immigration and falling birth rates are not addressed quickly enough, Social Security could face a significant cash crunch.

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