(June 2005) The impending retirement of the baby-boom generation has raised widespread concerns about the ability of the Social Security system to meet that generation’s benefit demands. The number of Americans over age 65 is expected to reach 20 percent by the year 2030, when the nation as a whole will have a higher percentage of older people than Florida does today.

Today’s debates on reforming Social Security focus on how this system—a social insurance program based on principles of individual equity and social adequacy—can fulfill its mission in the face of social, demographic, and economic trends. This article discusses both those underlying demographic trends and the current proposals to address what the Social Security Administration projects would otherwise be a substantial shortfall in benefits by mid-century.

More Retirees + Fewer Workers = Trouble for the System

Historically, benefits administered by the Social Security Administration for retirees and other beneficiaries have been largely financed through taxes paid by current workers. The financial health of the system is thus sensitive to the ratio of retirees to workers, which is sometimes called the old-age dependency ratio or old-age support ratio. As commonly expressed, this ratio represents the number of retirees that 100 persons of working age (ages 18 to 64) currently support. (The Social Security Administration uses a more refined measure of the support ratio, looking only at those workers and beneficiaries covered by the Old Age and Survivor’s Insurance (OASI) benefit system.)

The dependency ratio—and thus the stress on the Social Security system—increases dramatically when cohorts of retiring workers are replaced by smaller cohorts of active workers. Between 1980 and 2010, the ratio has been and is projected to remain relatively stable, increasing slowly by 2010 to an estimated 32 beneficiaries per 100 covered workers.

But after 2010, the first cohort of the baby boom—those born in the late 1940s—will reach age 65 and will be reflected in a much higher dependency ratio. The ratio is projected to reach 39 by 2020 and then increase to about 46 by 2030. While there are today approximately 40 million OASI beneficiaries, that number is forecast to grow to 43 million in 2010 and 71 million by 2030. (See Figures 1 and 2.)


Figure 1
Projected Distribution of the U.S. Population in 2000, by Age Group and Gender

Source: Population Reference Bureau, analysis of the Census Bureau’s U.S. Interim Population Projections, accessed online at www.census.gov/
ipc/www/usinterimproj/ on May 23,

Figure 2
Projected Distribution of the U.S. Population in 2050, by Age Group and Gender

Source: Population Reference Bureau, analysis of the Census Bureau’s U.S. Interim Population Projections, accessed online at www.census.gov/
ipc/www/usinterimproj/ on May 23,

Will the Social Security system be able to handle this rapid demographic transition? By law, the Social Security Administration (SSA) is required to look 75 years into the future to determine the sustainability of the system. The SSA’s Board of Trustees uses economic and demographic forecasts—on such factors as marriage and childbearing patterns, future life expectancy, unemployment rates, and the growth rate of the economy—to determine if enough money will be collected by current workers to pay the benefits due those in retirement. In turn, Congress uses these forecasts to guide its decisions on changes to the tax or benefit system.

The trustees’ 2005 intermediate projection of system sustainability states that the SSA trust fund will be exhausted by 2041 if no changes were made to the current law. The trustees also project that the cost of paying benefits will exceed tax revenue from current workers by 2017, at which point the principal of the trust fund will start to be drawn down. If the trust fund is exhausted, taxes collected will be sufficient to pay only 74 percent of the benefits due to Social Security recipients in 2041 and 68 percent of scheduled benefits in 2079.

Proposals to Fix the System

While some analysts argue with the underlying assumptions of these projections, most of the discussion centers on the exact nature and extent of the changes needed to preserve the system. Some observers advocate a complete overhaul, while others suggest that “tinkering” (for example, by increasing the cap on taxable wages) may be sufficient. The range of proposals is vast and constantly changing as discussions encompass the implications of a benefit shortfall for the economy as well as for recipients.

The Bush Proposals: Personal Savings Accounts and Price Indexing

President Bush recently has advanced two related proposals for Social Security reform. The first—the creation of personal savings accounts—is not designed to address the insolvency problem, but to provide individuals greater direction for the investment of their contributions.

Under this plan, individuals could voluntarily contribute part of their payroll taxes to an individual account rather than depositing them into the trust fund. They could decide how that account would be invested and use it to supplement a smaller retirement benefit paid by the Social Security Administration.

Critics of personal savings accounts point out that these accounts fail to address the underlying solvency issue, the administrative costs of tracking individual accounts, and the uncertainty of future benefit amounts. Those who invest poorly could receive substantially less than under the current system. Such shortfalls could unfairly affect low-income and less-educated workers, who are generally more dependent upon Social Security benefits in their later years.

The second Bush proposal would index Social Security benefits to price changes for upper– and middle–class workers, who make up most of the workers in the system. Indexing to price changes (instead of the current indexing to wages and increased productivity) would result in smaller average benefit increases in retirement, since prices have historically tended to rise more slowly than wages.

Supporters of this proposal point out that indexing to price changes would preserve the purchasing power of benefits for upper-income recipients while also allowing lower-income workers to receive larger benefit increases. The plan’s critics say that it would adversely affect middle–income workers and that it would cut benefits too sharply for some workers.

Incremental Proposals

Several alternative and incremental proposals to reform Social Security are also being widely discussed. One of the most popular of these options is to increase the cap on taxable wages (which in 2005 was set at $90,000) so that more income flows into the system. Other suggestions include:

  • Lengthen the time period used to compute benefits—a change that would tend to add earlier work years (when wages are lower) to the benefit calculation and therefore reduce the benefit due a worker.
  • Tax as income those benefits beyond what an individual worker contributed.
  • Extend coverage of the system to state and local employees currently not covered, thereby increasing the flow of tax revenues into the system.
  • Accelerate the increase in the retirement age so that it becomes 67 by 2011. (Under the current rate of increase, the retirement age will not reach age 67 until 2022). Each one-year increase in the normal retirement age would result in a 5 percent reduction in benefit payments out of the system.

Investing the Trust Fund and Means-Testing

A more dramatic proposal argues that part of the trust fund should be invested in the stock market. Currently, funds may only be invested in U.S. government securities, which are very safe but pay a very low rate of interest. Investing in stocks might generate higher investment returns and leave beneficiaries with greater assets over time.

Advocates of this change claim that, since it requires no alteration in the current benefit structure, it is the safest and least controversial reform proposal. Others argue that making the government a stockholder in many American companies may open the door for political interference in the economy. There are also concerns about the stock market’s inherent unpredictability.

Finally, some analysts advocate means testing retirement benefits—reducing or eliminating benefits to retirees who have substantial private pensions, savings, and other sources of retirement income. Critics of means testing point out that this approach would alter the very nature of the system from one in which all benefit to a system targeted at low-income workers. Such a change could also reduce the political viability of the system by reducing the constituency with a stake in the program. Administrative costs as well as incentives for people to “game” the system would also increase.

Heated discussions, conflicting data, and a wide range of proposed options continue to influence the current debate about the future of Social Security. But most experts agree that changes to the Social Security system are both inevitable and necessary to preserve what is one of the largest and most popular entitlement programs in the United States.

Christine Himes is professor of sociology and senior research associate with the Center for Policy Research at Syracuse University.


Constantijn Panis et al., “The Effects of Changing Social Security Administration’s Early Entitlement Age and the Normal Retirement Age” (Santa Monica: RAND, 2002), accessed online at www.rand.org, on May 27, 2005.

Social Security Administration, The 2005 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds (Washington, DC: US Government Printing Office, 2005), accessed online at www.ssa.gov, on May 21, 2005.