Don't Blame Baby Boomers for Social Security's Woes! Blame the Rich

By Sean Williams Markets Fool.com

For a majority of retired Americans, Social Security provides a financial foundation that allows them to meet their monthly expenses. The average retired worker was bringing home $1,365.35 a month as of the March 2017 snapshot from the Social Security Administration, enough to account for at least half of all monthly income for three out of five seniors currently receiving benefits.

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Seniors' reliance on Social Security makes the fact that the program is in imminent danger all the more worrisome. According to the Social Security Board of Trustees' 2016 report, Social Security will begin paying out more in benefits than it's generating in revenue by 2020, leading to the complete exhaustion of its more than $2.8 trillion in excess cash by the year 2034. Though America's most important social program won't be insolvent, the current payout structure will need a major overhaul, which could lead to across-the-board payout cuts of up to 21%.

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A number of theories on why Social Security is in trouble

A lot of you might be wondering how Social Security got into this mess. There have been a number of valid theories proposed over the years.

Some blame the baby boomers. The surge in baby births following the end of World War II simply couldn't have been foreseen by Social Security's architects in the mid-1930s. As baby boomers hit retirement age and begin exiting the workforce, there simply won't be enough new workers, or payroll tax revenue generated by these new workers, to sustain the current payout structure. In the span of two decades the worker-to-beneficiary ratio is expected to fall from 2.8-to-1 to 2.1-to-1.

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Others put the blame on Social Security's exceptionally cautious investment strategy with its spare cash. This excess capital is invested in special issue bonds and, more rarely, certificates of indebtedness. Like any interest-bearing asset, the yields on these special bonds are at the mercy of the Federal Reserve's monetary policy. With bonds in essentially a three-decade bull market, and yields having an inverse relationship with bond prices, the yields (and therefore return) on Social Security's spare cash have dwindled.

Lengthening life expectancies have also been a common point of blame. Life expectancies have risen by approximately nine years since the mid-1960s, which means retirees have been able to draw benefits from Social Security for longer periods of time. This rapid improvement in life expectancy is also something Social Security's architects never foresaw.

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Even the saving habits of Americans can be blamed. A recent study from GoBankingRates found that 69% of Americans had $1,000 or less in their savings accounts, and St. Louis Federal Reserve data from February shows that the personal saving rate in the U.S. is a meager 5.6%. Long story short, poor saving habits have pushed retirees to be exceptionally reliant on Social Security, thus weighing on the program.

The rich may be the problem

But what if these aren't the real issues at all? What if, instead, the wealthy are to blame for Social Security's projected $11.4 trillion budgetary shortfall?

In a working paper published in the National Bureau of Economic Research last month entitled "How the Growing Age Gap in Life Expectancy May Affect Retirement Benefits and Reforms," the 13 contributing researchers examined the impact that wealth inequality may be having on Social Security and came to a shocking conclusion.

The researchers examined the mid-career earnings history (ages 41-51) of a group of men in 1980 and 2010 to correlate how long they would live based on their income. In 1980, the bottom 20% of income earners lived to an average of 76.6 years, while the wealthiest 20% lived to be 81.7 years old -- a difference of 5.1 years.

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However, by 2010, the bottom 20% had seen their life expectancies fall half a year to 76.1 years, while the top 20% of income-earners gained more than seven years to 88.8 years. In just 30 years the gap in life expectancy between the rich and the poor has swelled to 12.7 years. Even though women's income was not examined, the researchers said with confidence that the data would be similar, if not show an even wider gap.

Since the wealthy earn more throughout their lifetimes, they'll be entitled to larger monthly payouts during retirement from Social Security than lower-income workers. The rich are also living more than a decade longer at this higher payout, which may be swamping Social Security.

The reasons behind this widening life-expectancy gap are highly debatable, but it's likely that the wealthy's access to medical care (since paying for medical care isn't a financial burden for the rich) is playing a key role. Even with the passage of the Affordable Care Act, affording healthcare can still be a struggle for low- and middle-income Americans.

Something for Congress to consider

The widening income gap, and thus life expectancy gap, is something that Congress may need to give strong consideration to when looking at ways to fix Social Security. Remember, we're down to 17 years before Social Security's excess cash is completely gone.

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Solutions haven't been a problem. In fact, Democrats and Republicans have a smorgasbord of Social Security fixes that would absolutely work based on actuarial data. But therein lies the problem. Both parties have workable fixes for Social Security, and neither wants to back down and consider the other party's proposal.

Any long-term Social Security fix is probably going to need to meet in the middle and include a core solution from the Democrats and Republicans.

Republicans have long favored gradually increasing the full retirement age, or the age at which the Social Security Administration deems a person eligible to receive 100% of their monthly benefit. Increasing the full retirement age would properly reflect growing longevity.

At the same time, it's pretty clear from the working paper data that the rich are living longer than ever and reaping those rewards from Social Security (and Medicare, for that matter). Democrats would like the ability to tinker with the maximum taxable earnings aspect of the payroll tax and ensure that the rich pay more into Social Security. Considering this life expectancy gap, a higher tax rate would make sense.

With the clock ticking, the time has come for Congress to act.

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