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Study: Baby Boomers Aren’t to Blame for Social Security’s Grim Future

Study: Baby Boomers Aren’t to Blame for Social Security’s Grim Future

Many have heard the outcry that baby boomers are killing Social Security, but that may not be the case according to a new study by the Center for Retirement Research at Boston College.

The study, however, found that boomers will have paid more into Social Security than what they will receive themselves in retirement.

Baby boomers, people born between 1944 and 1964, have received much of the blame for the reduction of funds in Social Security. It’s hard to argue against that claim when 10,000 people turn 65 every day, according to CNBC. The study, however, found that boomers will have paid more into Social Security than what they will receive themselves in retirement.

People that lived through the Great Depression of the 1930s are actually the greatest beneficiaries of Social Security because they worked fewer years before collecting benefits. They effectively have received more money than they put into the system, leading in part to the shortfall coming in 2035 unless politicians in Washington, D.C., stop kicking the can down the road and do something about it.

While they worked less before collecting, the key policy decision during the program’s infancy to make Social Security pay-as-you-go has led to the funding issues today, according to the study.

“Whenever you have a pay-as-you-go system, it’s going to be more expensive than a fully funded system,” said Geoff Sanzenbacher, associate director of research at the Center for Retirement Research.

CNBC explains the Social Security funding problem in greater detail, along with some possible solutions:

‘Missing Social Security’s Trust Fund’

Social Security has made headlines for the funding shortfall it could face if nothing is done to change the system.

The latest report from the Social Security Board of Trustees projects the system’s trust funds will be depleted in 2035. At that point, only 80% of expected benefits will be payable.

At its inception in 1935, Social Security resembled a private insurance plan, where the funds coming closely matched the contributions and benefits for the different age cohorts.

But that was changed with amendments that were made in 1939 adding benefits for spouses and minor children of retired workers, as well as survivor benefits for families if a worker died. At that time, benefits were tied to average earnings.

Those changes meant that some retirees received more in benefits than they had contributed to the system. Payroll tax receipts were used to make those payments.

However, that prevented the system from expanding the trust fund. Without those increasing reserves, the system also misses out on interest the money could be earning.

The “Missing Trust Fund,” as it is named in the research, makes the program more expensive for current participants, because they have to contribute money both for their benefits and to make up for those missing funds.

As it stands, today’s benefits are roughly in line with costs, and consequently are not too generous, Sanzenbacher said. “But we need to deal with this legacy debt,” he said.

Possible Solutions for Social Security Funding

There are a couple of approaches that could be used to make up the shortfall, according to the research.

One way would be to raise taxes. Any increase would need to be permanent, according to the research.

Another possible solution would be to increase taxes temporarily until a sufficient trust fund is established. Once that money is there, the system could return to today’s level of payroll taxes. The current Social Security tax rate is 12.4%, which is evenly split between employers and employees.

The tax increases could come in several forms: by increasing the payroll tax percentage and maintaining the current Social Security cap of $132,900; increasing the payroll tax and eliminating the payroll tax cap; or shifting from a payroll tax to income tax.

Small tax raises could be used to supplement interest the trust fund hasn’t been earning as it is being depleted, while larger increases could help replace the trust fund itself.

“There are different ways to deal with this issue,” Sanzenbacher said.

That will require considering whether to put the burden on current generations, future generations or something in between, he said.

“We’re going to have to do something,” Sanzenbacher said. “We’re not trying to propose whatever it is we do.

“We’re just trying to make the point that you can make different choices.”