The 2 Biggest Social Security Problems No One Is Talking About | Personal Finance

(Sean Williams)

Social Security is vital to the financial well-being of our country’s retired workers, as well as millions of workers with disabilities and the survivors of deceased workers.

The Center on Budget and Policy Priorities released a report in April 2022 showing that nearly 22.5 million people are lifted out of poverty every year as a result of Social Security benefits. In addition, the poverty rate for elderly Americans is 9% due to the existence of Social Security, as opposed to an estimated 38% without the program.

But as great as this program has been for more than eight decades, Social Security is full of problems.

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

The latest annual report from the Social Security Board of Trustees states that the Old-Age and Survivors Insurance Trust, which provides monthly benefits to retired employees and survivors, is on track to deplete its asset reserves — the excess income that has accumulated since its inception — – by 2034. While Social Security and the OASI are not at risk of insolvency or bankruptcy, failure to resolve this capital shortfall could result in retired workers and survivor benefits being cut by an estimated 23% in 12 years.

Some Social Security shortcomings are well known. For example, the continued retirement of baby boomers from the workforce is something lawmakers have known for decades would negatively impact the program. As more boomers retire, the employee-beneficiary ratio has declined. In other words, there aren’t enough new employees to stop boomers from retiring.

Another Social Security issue that has been well documented is the inability of the cost of living adjustment (COLA) to keep up with the actual inflation that seniors face.

Ideally, Social Security’s inflationary chain, the Consumer Price Index for Urban Wages and Employees (CPI-W), should help keep the purchasing power of Social Security dollars stable with the rising price of goods and services. But Mary Johnson, Social Security policy analyst for The Senior Citizens League, an impartial advocacy group for seniors, notes that the purchasing power of Social Security benefits has fallen 40% since 2000.

As you will see from the full name of the CPI-W, it is designed to track the spending habits of city and administrative staff, many of whom are of working age and do not receive monthly Social Security benefits. That’s a problem because most of the beneficiaries are seniors. As a result, important costs for retirees are often underweighted in the COLA calculation, while less important costs are given an extra weight.

The Two Huge Social Security Problems No One Is Talking About

But these known flaws represent only half the story of what worries Social Security. There are two other major issues that play a key role in Social Security’s projected cash shortfall by 2034 — and hardly anyone is talking about either issue.

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1. Historically Low Birth Rates

The first issue that has flown under the radar is America’s steadily declining birth rate. According to the Centers for Disease Control and Prevention, the fertility rate in the US — that is, 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 U.S. fertility rate screamed to an all-time low of about 1.6 expected births per woman. The birth rate has been falling sharply for more than a decade.

The reason for this decline is complex and the result of a long list of plausible factors. We witness couples waiting longer to get married and have children. There is also a decrease in unintended pregnancies, which may reflect Americans having 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” all weighed on consumers’ wallets and made them think twice about the added cost of having children.

Historically low birth rates will put even more pressure on the already declining ratio of workers to Social Security beneficiaries. If there aren’t enough future workers to counteract those retiring, the Social Security shortage could be even greater than the current Board of Trustees forecast.

2. Significant drop in legal immigration

The other Social Security problem that isn’t getting enough attention is the more than two-decade slump in legal immigration to the United States.

Despite what you may have heard or read, immigration is 100% social security positive. Most legal immigrants who come to the US tend to be younger, meaning they will spend decades in the labor market and generate payroll tax income that supports Social Security. In fact, the Social Security Board of Trustees currently models an annual average of 1,281,000 legal immigrants entering the US over the next 75 years.

Unfortunately, legal immigration to the US has been steadily declining since the 1990s. While a total of about 8.86 million legal immigrants entered the U.S. in the five-year period ending in the first half of 1997, only 4.77 million people legally entered the U.S. in the five-year period ending in the first half of 1997. half of 2017, according to World Bank data. One can only assume that the immigration picture was even more challenging during the COVID-19 pandemic.

If the decline in legal immigration and declining birth rates are not addressed relatively quickly, Social Security could face a significant cash shortfall.

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