The Two Biggest Social Security Problems Nobody Talks About | personal financing

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

The Center for Budget and Policy Priorities released a report in April 2022 that showed that approximately 22.5 million people are pushed out of poverty each year as a result of Social Security payments. Furthermore, the poverty rate among elderly Americans is 9% with Social Security, versus 38% without the program.

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

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Social Security has a number of well-known and long-standing issues

The latest annual report from the Social Security Board of Trustees indicates that the Old Age and Survivors Insurance Fund, which provides monthly benefits to retired workers and survivors, is on track to deplete its asset reserves — the excess revenue it has accumulated since its inception — by 2034. Social and OASI are not at risk of insolvency or bankruptcy, failure to fix this capital shortfall could reduce benefits for retired workers and heirs by an estimated 23% over 12 years.

Some of the shortcomings of Social Security are well known. For example, the ongoing retirement of baby boomers from the workforce is something lawmakers have known for decades that would negatively impact the program. As more baby boomers enter retirement, the ratio of workers to beneficiaries has fallen. In other words, there are not enough new workers to cope with the retirement of boomers.

Another well-documented problem for Social Security is the inability of the Cost of Living Adjustment (COLA) to keep pace with the real inflation faced by older adults.

Ideally, Social Security’s inflationary rope, the consumer price index for urban wage earners and clerical workers (CPI-W), should help keep the purchasing power of Social Security dollars steady as prices for goods and services rise. However, Social Security policy analyst Mary Johnson of The Senior Citizens League, a large nonpartisan advocacy group, notes that the purchasing power of Social Security benefits has fallen 40% since 2000.

As you’ll notice by CPI-W’s full name, it was designed to track the spending habits of urban and clergy workers, many of whom are of working age and do not receive their monthly Social Security benefit. This is a problem, as most of the beneficiaries are elderly people. As a result, significant costs to retirees tend to be understated in the COLA account, while less significant expenses are given additional weighting.

The two huge Social Security problems no one talks about

But these well-known flaws are only half the story of what’s bothering Social Security. There are two other big problems playing a major role in the projected Social Security cash shortfall by 2034 – and hardly anyone talks about either of those issues.

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1. Historically low birth rates

The number one problem that flies under the radar is the steadily declining birth rate in America. According to the Centers for Disease Control and Prevention, the fertility rate in the United States – an estimate of the average number of children a woman will have in her lifetime – needs 2.1 to replace exactly one generation. In 2020, the fertility rate in the United States reached an all-time low at about 1.6 expected births per woman. Birth rates have fallen sharply for more than a decade.

The reason for this decline is complex and the result of a long list of plausible factors. We are seeing couples waiting longer to get married and have children. There has also been a decrease in unwanted pregnancies, which may be a reflection of Americans’ easier access to contraceptives.

Even the US economy could be to blame. The Great Recession (2007-2009), the COVID-19 pandemic, and the current tech “recession” have all taken their toll on consumers’ pocketbooks and made them ponder the additional costs of having children.

Historically low birth rates will add further pressure to the already declining worker-to-beneficiary ratio of Social Security. If there aren’t enough future workers to meet retirees from the workforce, Social Security’s cash shortfall may be greater than the Board of Trustees’ current projections.

2. A significant decrease in legal immigration

Another problem for Social Security that gets nearly insufficient 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% Social Security positive. 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 underpins 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 annually over the next 75 years.

Unfortunately, legal immigration to the United States has been steadily declining since the 1990s. While approximately 8.86 million legal immigrants entered the United States in the five-year period ending in the first half of 1997, only 4.77 million people legally entered the United States in the five-year period ending in the first half of 2017, according to data from World Bank. One can only assume that the picture of immigration has been more difficult during the COVID-19 pandemic.

If the legal decline in immigration and low birth rates are not addressed relatively soon, Social Security could face a severe cash shortage.

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