Real-life Case Study: Will Social Security Survive?
Public Policy
Until the 1930s, paying for retirement was almost entirely up to the individual. During the 1930s, however, the Great Depression left nearly half of all senior citizens unable to support themselves. To help them, the federal government created the Social Security program in 1935.
Social Security System Here's how the program works. Workers pay a Social Security tax, which is matched by their employers. After they retire, workers receive Social Security payments for the rest of their lives.
Social Security is a “pay as you go” system. Most of the Social Security taxes paid by today's workers are used to pay benefits to today's retirees. Any surplus is put into trust funds to earn interest. In 2001, there were 3.4 workers paying taxes for every retiree receiving benefits.
Trouble Ahead Many economists are concerned about what will happen to Social Security in the future. If the system continues unchanged, experts warn that Social Security payments will exceed revenues in the year 2018. By 2042, the Social Security trust fund will be exhausted.
Why will this system be broke by the 2040s? The reason is the “baby boom,” the period between 1945 and 1964 when there was a large increase in the number of babies born. As baby boomers retire, there will only be two workers for every retiree receiving benefits. Also, life expectancies are rising, which means that Americans will collect benefits longer.
President Franklin D. Roosevelt signed the Social Security Act into law in 1935.
Possible Solutions In the early 2000s, the President and Congress began to focus their attention on saving Social Security. But how should it be done? Some people believe that the age of retirement should be further increased. Others believe that the government should invest Social Security reserves in the stock market. However, all agree that depriving Americans of Social Security would be disastrous.
| Year | Americans aged 25-64 | Americans aged 65 and over |
|---|---|---|
| 2000 | 142,883 | 34,709 |
| 2010 | 155,660 | 39,408 |
| 2020 | 161,999 | 53,220 |
| 2030 | 162,252 | 69,379 |
| 2040 | 171,360 | 75,233 |
| 2050 | 182,621 | 78,859 |
Source: U.S. Census Bureau
Applying Economic Ideas
- Do you think that paying Social Security taxes should be mandatory? Explain.
- How do baby boomers present a challenge to the future of Social Security?
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