2024’s Record Number of Retirees May Spark a Recession

This year will see a record number of Baby Boomers reach the traditional retirement age. All of them will be at least 65 by 2030. However, this poses a financial challenge since fewer taxable workers eventually translate into less funding for Social Security. There will be a serious crisis if Congress does not take action. Here’s how one of our most significant government programs could be threatened by a demographic shift and what might be done about it.

The Baby Boomers’ Role in the Economy

The baby boomer generation—those born between 1946 and 1964—has bolstered the American economy for many years. Their sheer numbers helped the economy grow quickly for a long time, and since all workers paid into Social Security, the system seemed to be doing well. However, the number of retirees rose sharply in 2008 as baby boomers started to leave the workforce.

Because life expectancy has increased, more retirees are receiving benefits for longer periods of time, and fewer young people are joining the workforce today due to lower birth rates in their parents’ generation. This puts pressure on both sides: lower payroll tax revenue because fewer people are joining the workforce as birth rates decline, and higher costs for all those retirees living longer lives. All of this places a great deal of strain on Social Security.

The Trust Fund and Its Challenges

Forecasts* show that the trust funds will run out by 2034 if policy remains unchanged. Treasury bonds, which are, in simple terms, government IOUs, are running low in the program. Social Security used to collect more money than it needed to pay out in installments, so for many years, it received IOUs in exchange for lending money to other government programs. But about ten years ago, things started to change. Over the last ten years, we have disbursed more benefits than we have earned from Social Security.

Cashing in the numerous IOUs from previous years enabled the program to continue making full payments. Currently, there are about $3 trillion worth of IOUs, but that number is declining every year. When all IOUs are cashed in by 2034, retiree benefits will be immediately reduced by 25%. As the number of workers per retiree continues to drop, this number is expected to increase.

The Reality of a Social Security Shortfall

The majority of Americans depend on these monthly benefit checks to augment their retirement income, per research.* More than half of people between the ages of 55 and 66 had no retirement funds, according to Census Bureau data.* Would you be able to bear losing a quarter of your current take-home pay? Those at the bottom of the income spectrum and those without a college degree should pay particular attention to this problem.

Seniors with lower retirement incomes also typically spend less. When consumer spending declines, businesses may be forced to lay off workers, which results in lower economic activity and fewer jobs. It might have a cascading effect that leads to a recession later down the line.

The Impact on Future Generations

This issue will impact all future generations,* not just Baby Boomers. They might be required to pay a marginally increased payroll tax. More importantly, they might be asked to work for longer.* The Social Security funding deficit adds to the overall federal budget deficit, and as a result, we have to borrow money and issue bonds. Because of this pressure on interest rates, buying a home becomes more difficult. In order to continue funding Social Security, Congress may also need to cut spending on other programs, like environmental efforts or the military.

The Need for Legislative Action

So, what then must we do to give Social Security a stronger foundation? A new law must be passed by Congress. What kind of law, and when? We’re still unsure. Changes to retirement programs and benefits take a very long time to take effect. For example, raising the retirement age to 67 back in 1983 was one of the last significant Social Security reforms we enacted, but it took almost 40 years to implement.

“There is a 10-year window, but we do not have ten years to act. There must be some kind of legislative solution between now and then. According to the law, the program cannot borrow money from anyone else. Social Security is too important and popular to let it run out of money.”*

Many of the solutions that have been put forth over the years call for the wealthiest citizens of the nation to start paying their fair share of taxes. Politicians, however, typically cannot agree on whether taxes should be raised or benefits should be cut. No one cure-all will solve Social Security’s long-term issues, but those are the two primary strategies you’ll see for doing so. However, Congress will probably need to think about multipole solutions to tackle it as a group.

However, economists do not expect any action to be taken soon. Everyone, including those up on Capitol Hill, understands that Social Security has this flaw. However, no one seems willing to take action about it. “As we all apparently agree, Social Security and Medicare are off the books for now. We all wish politicians would show the courage necessary to tackle this issue now and not wait until the 11th hour.”*

*Watch this video from the Wall Street Journal to learn more.