Baby Boomers begin drawing from Social Security; Economists say the real problem is Medicare

Social Security has become a favorite talking point for politicians as the Baby Boom generation begins to retire. For most people, the decision about when to take benefits has more to do with personal financial housekeeping than politics, but it's important to stay informed. As the primaries come to an end and the general election gets into full swing, the Democratic and Republican nominees will undoubtedly continue the Social Security squabble. As with other hot-button political issues, it can be difficult to separate the facts from the rhetoric. A story from NPR's John Ydstie on today's Morning Edition does just that. His interviews with Social Security Administration officials and economist Henry Aaron are worth hearing (and not included in the excerpt from NPR's website below). Listen to the full story here.

Morning Edition, January 2, 2008 · For decades politicians, pundits and scholars have been warning about the looming retirement of America's baby boom generation and its impact on Social Security.

Well, the baby boom's retirement is not just looming anymore .... It's here.

This year, the first of the baby boomers will turn 62 years old and become eligible to claim Social Security retirement benefits. The Social Security Administration projects that about a million of those first baby boomers, people born in 1946, will take the early retirement option even though their monthly checks will be 25 percent lower than if they waited until they are 66, their normal retirement age.

In all, there are nearly 80 million baby boomers, Americans born between 1946 and 1964. They've had a big impact on American culture and they'll have a big impact on Social Security's finances. That's because they had a lower fertility rate than their parents and grandparents. Baby boom females had, on average just under two children, down from over three children per woman in previous generations.

That "baby bust" means there will be fewer workers paying into the Social Security system to support each retiree. Instead of three workers per retiree, there'll be just two.

As a result, in 2017 the payroll taxes flowing into the Social Security system won't be enough to cover promised benefits. But the system will remain solvent because the Social Security Trust Fund will be able to cover the shortfall until 2041.

Then, if nothing is done to shore up the system, payroll taxes will cover just 75 percent of promised benefits. To bring the system back into financial balance the Congress and president will have to agree on tax increases or benefit cuts, or both. If they decided to just raise taxes to solve the problem they could make the system solvent for the next 75 years by boosting the payroll tax 1 percentage point for workers and 1 percentage point for employers. These are all numbers from the Social Security Trustees annual report for 2007.

Despite the often overheated rhetoric about Social Security, it's financial problems could be easily solved by modest tax increases and benefit cuts.

An even bigger problem facing the country is the rising cost of medical care. As a result, the projected cost of Medicare and Medicaid will jump more than seven times faster than the cost of Social Security over the next four decades.