Freeing Boomers From Social Security Cuts Blows Up Math

Young people may be the biggest casualties of the U.S. Congress’s unwillingness to fix Social Security.

Retiring Baby Boomers are swelling the program’s rolls, with 10,000 turning 65 every day, according to the Pew Research Center. By 2035, there will be only two workers paying taxes to finance benefits for every retiree. While lawmakers have no solution, they generally agree they can’t make significant cuts for those in or near retirement.

The longer Congress waits to act, the more people will be shielded -- and the more heavily cuts will fall on younger Americans. The result could be a two-tiered system raising questions about generational fairness, said Andrew Biggs, former deputy commissioner of the Social Security Administration.

“It’s like a seesaw -- if one side is up, the other side has to be down,” he said. “Nobody wants to do the actual things you have to do so you don’t screw your kids on this stuff.”

The Social Security benefits math is an illustration of the price of failing to address the long-anticipated retirement of the Baby Boom generation.

The eldest of those 77 million Americans born between 1946 and 1964 became eligible for Social Security four years ago. The basic problem with the benefits math is the number of retirees in this generation is growing much faster than the number of workers supporting them through the Social Security payroll tax.

Decades in the Making

The trend has been decades in the making. In 1965, for example, 81 million workers were supporting 20 million beneficiaries -- about a four-to-one ratio.

That will shrink this year to a ratio of 2.8 workers, according to an annual report released this week by the Social Security trustees. By 2035, the ratio will decline to 2 workers, the trustees said, with 186 million workers and 91 million Americans receiving benefits.

Neither Democrats nor Republicans have a plan to fix the problem. House Budget Committee Chairman Paul Ryan’s 2013 budget proposal calls for overhauling the government’s other major retirement program, Medicare, while suggesting that policymakers offer ideas on Social Security. President Barack Obama has expressed support for shoring up the program without proposing specific solutions. The last major cuts to the program were made in 1983.

Some lawmakers who have resisted making changes said the trustees’ report, which showed the program’s trust fund will run dry in 2033, emphasized they have time to consider solutions.

20 Years More

“The program will be fully funded for more than 20 years, so we have time to find smart ways to improve it,” said Senate Finance Committee Chairman Max Baucus, a Montana Democrat whose panel has jurisdiction over the program.

The trustees said once the trust fund is depleted, incoming revenue will be enough to cover only three-quarters of scheduled benefits. That means if Congress doesn’t act, after that payments would be cut by 25 percent for all beneficiaries including “the poor 95-year-old widow,” said Chuck Blahous, one of the program’s trustees.

Lawmakers generally agree it’s unfair to make significant cuts for current retirees because they’ve planned around the current system and don’t have time to rebuild their nest eggs to make up the difference from any cuts. According to AARP, the advocacy group for the elderly, Social Security checks kept 35 percent of seniors out of poverty in 2010.

‘Over a Lifetime’

“People make their decisions over a lifetime -- they do a certain amount of saving, they do a certain amount of spending on the assumption that they’ve earned this particular benefit,” Blahous said. “We should strain every nerve and muscle to make sure that the people already in retirement, whatever their income level, don’t lose benefits they planned on.”

That’s one reason why Ryan’s Medicare overhaul wouldn’t take effect until 2023 and would apply only to those currently younger than 55. The chairmen of Obama’s debt-reduction commission called for changing Social Security’s benefit formula only for those retiring after 2016. They also proposed raising the retirement age -- starting in 2027.

If lawmakers wait until 2033 to act and decide to exempt those already on the rolls from cuts, they couldn’t make the program’s finances balance even if they began eliminating benefits for younger Americans, according to Blahous.

“That’s how crazily out of balance it is by then,” he said. “The options before us in 2033 are just not feasible.”

Part of the reason for lawmakers’ inaction, even as they debate overhauling Medicare, is that it’s politically more difficult to cut Social Security, said Marc Goldwein, policy director of the Washington-based Committee for a Responsible Federal Budget.

Differences From Medicare

That’s because with Medicare there are middle men. The government pays doctors and hospitals and others to care for seniors. If Congress cuts payments to them, seniors may not notice. By contrast, with Social Security, there is just the government and a check, and it’s harder for beneficiaries not to notice the cuts.

“With Social Security, everyone is very clear on exactly what they’re getting,” Goldwein said. “With Medicare, it’s much more abstract.”

The irony may be that the longer Congress waits to address the issue, the more wrenching the changes will need to be and the more likely lawmakers will have to accept solutions they don’t want, Blahous said.

“If you delay long enough, neither side gets what they want,” he said. “If you delay long enough, then you have to swallow tax increases that conservatives don’t want, and if you delay long enough, you have to abandon a lot of the benefit protections that progressives want. So everybody loses.”

To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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