Labor Force Participation Rate and Social Security

Social Security is in trouble.  We've been hearing that for years and the data suggests that the problem is no where close to being solved.  This is a problem that can be resolved, but the question is how can it be fixed without a major overhaul to the program?

The problem is simple, the projected income in to the program is expected to become insufficient to cover the expected obligations because the number of individuals collecting is going to exceed the capacity of workers paying into the system.  This is also a problem that is finite; as the baby boom generation dies off (yes this is blunt) the number of collectors will drop off and the system will return to solvency because the capacity of payers will once again exceed the number of collecting.

So in the long run, this is a problem where we can kick the can down the road if the management of the system is done smartly.  The issue is how to increase collections before the system becomes insolvent.  The core of the problem is the drop in labor force participation.

The current labor force participation rate is 62.7%.  This is on a downward trajectory.  What's scary is the downward trend isn't because of more retirees.  The number of people 62 and over (and therefore eligible for early retirement from Social Security) participating in the workforce is increasing.  This means the participation rate for the normal working age population is decreasing.  Reversing this trend is necessary to the future solvency of Social Security.

However, this doesn't excuse Congress and the President from taking steps now that will help to extend the solvency of the system.  Remember, the problem is finite and will end up resolving itself with time.

While the majority of people who pay into the system receive benefits, sadly there's a significant number of people who never receive or receive less than they paid into the system because of early death.  This number will only rise as the retirement age increases.  Right now the retirement age is in a phased in increase from 65 to 67.  One simple way to help extend the solvency of the program is to allow individuals who are not able to retire at 65 because of the increased retirement age to pay in extra in order to be able to retire at 65 with full benefits.  For that matter, the system could be to where workers are allowed to pay extra in order to have full retirement at 62 rather than have early retirement with the penalty. 

As long as the increased payments were sufficient to fully fund the extra 2 (or in the case of early retirement 5) years worth outlays the system is not running any extra deficit.  This increases the solvency of the system because not only is there an immediate cash inflow which pushes back the insolvency date but the system ends up ahead as contributors have early demises and the system pays out no benefits.

The collection system is already in place, all that's needed is for the government to allow this to be a possibility.  Once a worker makes the election for extra contributions they would automatically be collected out of paychecks along with the current collections for benefits.