The Social Security Administration made an alarming announcement recently that they will exhaust their funding capability by 2033 which was several years earlier than originally projected. According to a recent article from Reuters: “Unless Washington politicians, who have been at war with each other over government spending priorities and federal budget deficits, can decide how to put Social Security on a sound footing, retirees’ pension checks would start running out in 2033, according to an annual report.
The baby boomers – those 78 million Americans born between 1946 and 1964 – started retiring last year. With 10,000 of them expected to retire every day for the next 19 years, according to the Pew Research Center, they will increasingly strain Social Security.”
As millions of baby boomers approach retirement more strain is put on the fabric of the Social Security system. The exact timing of this crunch is less important than its inevitability. The problem that Social Security has is “real” employment. I say “real”employment simply to sidestep the ongoing arguments about the validity of government employment survey’s from the Bureau of Labor Statistics. The question we want to know is if we are creating jobs and what types of jobs are we creating? The answer to those questions tells us much about the strength of the underlying economy.
The Federal Government receives income from the Social Security “contribution” from employee’s paychecks. The chart above shows the annual levels of employment as reported by the BLS versus the receipts of social security contributions. As you can see while there has been a negligible increase in the number of non-farm employees – social security“contributions” have decreased sharply by almost $70 billion from its peak.
This is due to two factors. The first is that the number of “real” employees, while growing, is in lower income producing and temporary jobs. Since social security contributions are calculated as a percentage of income – lower income levels produce lower contributions. We have written about this previously on the “real” employment situation. However, in a recent interview Richard Yaramone spoke specifically to this issue stating “I’m fortunate enough to travel and speak to chambers of commerce with 300 to 500 people in the audience. They all tell me, ‘Hey, listen, I am letting go of workers. I’m hiring them back at a fraction of what I used to pay them. You hear from the other side, ‘Hey, I finally got a job after two years of being unemployed. I used to make $100,000 (each year), now I’m making $45,000 or now I’m working part time.’ Or (you hear), ‘I used to make $500,000 and now I’m making $200,000 or making $125,000.’….”
Here is the key statement and something that we address often in regard to the NFIB survey’s: “So you are actually seeing this collapse, contracting on a real basis, of real disposable personal incomes. If you don’t have the money, you can’t facilitate expenditures. So that’s the core of the problem. That’s what’s really going on in the US economy. You don’t listen to what all of these bigger numbers coming across the screen tell you. You talk to the people who are running the country. 99.7% of all employer firms in this country are small businesses. So when they speak, you have to listen.“
The second factor is that a larger share of personal incomes is made up of government benefits which does not affect social security contributions. The chart tells the tale in this regard. Since the financial collapse government support of personal incomes spiked from just over 25% of incomes to almost 35%. This also does not include the 45 million plus Americans also collecting nutritional assistance, or “food stamps”, from the government.
The dependency upon government for financial support is a long term economic problem because it reduces economic prosperity. However, the problem that Social Security faces is that the program’s annual cash surplus continues to shrink due to lower receipts from working American’s. The problem for Social Security, and the U.S. in general, comes long before 2033. In 2017 or 2018, just 5 to 7 short years from now, Social Security will begin paying out more in benefits than it receives in taxes. It could come even sooner. As the cash surplus is depleted, which is primarily government I.O.U.’s, Social Security will not be able to pay full benefits from its payroll and other tax revenues. It will then need to consume ever-growing amounts of general revenue dollars to meet its obligations–money that now pays for everything from environmental programs to highway construction to defense. Eventually, either benefits will have to be slashed or the rest of the government will have to shrink to accommodate Social Security.
As millions of baby boomers begin to retire another problem emerges as well. Demographic trends are fairly easy to forecast and predict. (My friend Doug Short has done some excellent work in this area) Each year from 2008, when those born in 1946 reach Social Security’s early retirement age of 62, until 2025 we will see successive rounds of boomers reach the 62 year-old threshold. There is a twofold problem caused by these successive crops of boomers heading into retirement. The first is that each boomer has not produced enough children to replace themselves which leads to a decline in the number of taxpaying workers. It takes about 25 years to grow a new taxpayer. We can estimate, with surprising accuracy, how many people born in a particular year will live to reach retirement. The retirees of 2070 were all born in 2003, and we can see and count them today.
The second problem is the employment problem. The decline in economic prosperity, that we have discussed extensively, caused by excessive debt, reduction in savings, declining income growth due to productivity increases and the shift from a manufacturing to service based society will continue to lead to lower levels of taxable incomes in the future. Furthermore, with unemployment in the U.S. remaining stubbornly high, the longer that all-important 25-35 year old person remains unemployed the related loss in relevant job skills leads them to becoming unemployable.
This employment conundrum is critical. Back in 1950, as the baby boom was just beginning to start, each retiree’s benefit was divided among 16 workers. Taxes could be kept low. Today, that number has dropped to 3.3 workers per retiree, and by 2025, it will reach–and remain at–about two workers per retiree. Each married couple will have to pay, along with their own family’s expenses, Social Security retirement benefits for one retiree. In order to pay promised benefits, either taxes of some kind must rise or other government services must be cut. The chart shows this relationship between social benefits paid out in total (including social security, Medicaid, Medicare, etc.,) and the burden upon each non-farm employee. Back in 1966 each employee shoulders $555 dollars of social benefits. Today, each employee has to support $17,387 of benefits. The trend is obviously unsustainable unless wages or employment begins to increase dramatically and based on current trends that seems highly unlikely.
The entire social support framework faces an inevitable conclusion and no amount of wishful thinking will change that. The question is whether our elected leaders will start making the changes necessary sooner, while they can be done by choice, or later when they are forced upon us.
Images: Flickr (licence attribution)
About The Author
Lance Roberts – Host of Streettalk Live
After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.
Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.
Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.