The Impact of Changing Demographics

Since the mid-1960's the ratio of workers to Social Security and Medicare beneficiaries has been steadily declining.¹  Since the 1980's, federal deficit spending and the national debt have been spiraling out of control.²  As early as the 1990's former Comptroller General of the United States, David M. Walker, was warning that if we did not get spending under control it would require doubling of taxes or cutting benefits in half in order to make good on the promises we had made.  Instead of disciplining ourselves, the national debt has ballooned from $4 Trillion to $26 Trillion and counting!

In 2008, the first Baby Boomers began collecting Social Security and then qualified for Medicare in 2011.  Every day since then approximately ten thousand Baby Boomers are added to the rolls of Social Security and Medicare and this trend will continue for another 15 years or so while the amount of workers will likely continue declining.³

According to the Trustees for Social Security and Medicare, the Social Security retirement trust fund will be depleted in 2034, at which time tax revenue will only cover 76% of scheduled benefits.  The main Medicare trust fund will be exhausted in only 2026, which will leave a 10% shortfall from tax revenues.⁴

Add all these things together and what you end up with is what many believe to be a recipe for increasing taxes over the next several decades regardless of which political party wields power.

Finally, as the Baby Boomer generation ages and is forced to begin withdrawing from their IRAs and 401ks, the amount that they must withdraw each year also increases.  Some professionals believe the rate of withdrawal from the stock market that will be required over the next decade or two will be unsustainable for market values to hold up as they have in the past.

It's been nearly 20 years since David Walker began sounding the alarm.  Despite his tireless effort to get Congress to act sooner rather than later, the only thing they've done is to keep kicking the can down the road.  The longer they delay acting, the more painful it will be.  Some have suggested that the only alternative to doubling tax rates would be to cut benefits in half.  Being that the Baby Boomers, who are now the recipients of those benefits, represent such a large percentage of our population, it's unlikely that that solution would be any more politically expedient than doubling tax rates.  We're guessing that the reality will be somewhere in the middle - increased taxes and reduced benefits, both to some extent.

We believe that it would be prudent for you to begin researching this issue and potentially make some changes to your retirement planning to one degree or another.  It is well worth considering the wisdom of kicking your own tax payments down the road when it could end up costing you considerably more!

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

¹  Table IV.B3.—Covered Workers and Beneficiaries, Calendar Years 1945-2095, 2020 OASDI Trustees Report, Social Security Administration.

²  Three Layers of Massive Debt, The Heritage Foundation, 2019.

³  SMART Retirement, Matt Zagula, ForbesBooks, 2018.

⁴  Status of the Social Security and Medicare Programs: A Summary of the 2020 Annual Reports, Social Security Administration.