A new study debunks the myth that Baby Boomers are to blame for the financial shortfall facing Social Security and points out that the root of the problem was created in the late 1930s when policy makers decided to pay the first retirees benefits that far exceeded the contributions they made to the system.
Failing to build up a trust fund – like NYSTRS and other well-funded defined benefit pension plans have done – that could be invested to pay future benefits created a “pay-as-you-go” approach for Social Security, according to the June 2019 study by the Center for Retirement Research at Boston College.
While some point to the large numbers of Baby Boomers who will be retiring over the coming years as a major cause of pressure on Social Security, the Boston College researchers said this “much-maligned” group will have paid more into the system than they are scheduled to receive in benefits.
“This Missing Trust Fund makes the program more costly than it otherwise would be, as current participants are forced to contribute toward both benefits and the missing interest,” the researchers said in their report, “The Implications of Social Security’s ‘Missing Trust Fund.’”
If lawmakers had stuck to the original vision of Social Security as it was first approved in 1935 and built up a trust fund, the current Social Security tax rate of 10.4% would generate enough revenue to make the system fully funded, the researchers said.
The researchers, led by Alicia H. Munnell, director of the Center for Retirement Research at Boston College, said that to maintain current benefit levels and deal with Social Security’s financial shortfall, policy makers should consider two general options: raise taxes permanently to make up for the lack of trust fund interest or temporarily raise taxes by a higher amount to build up a trust fund.
This study and other industry research related to pensions are found in our Pension Education Toolkit.