Millennials foot the bill as boomers get massive Social Security checks

If you are a millennial staring at your paycheck and wondering why Social Security takes a bite out of it every month, it might interest you to know that the money you're paying isn't sitting somewhere with your name on it. It's helping pay retirees right now.

Your Social Security money isn't sitting in a vault

When you and your employer pay Social Security taxes, that money isn't simply placed into an account waiting for you to retire. Social Security operates largely on a pay-as-you-go basis, meaning today's workers help finance today's retirees.

So when a retiree receives a Social Security check, a chunk of the money ultimately comes from payroll taxes collected from people who are working now. And millennials are increasingly becoming a huge part of that workforce. The problem is there aren't as many workers behind them as there used to be.

The math gets uncomfortable very quickly

According to the Committee for a Responsible Federal Budget, a median-wage worker retiring in 2027 is expected to receive around $730,000 in lifetime Social Security benefits, while that worker and their employer will have paid less than $200,000 in Social Security taxes.

On paper, that's a spectacular return. The worker's lifetime benefits exceed the combined taxes paid after roughly six years of collecting benefits. And the pattern isn't limited to middle-income workers. CRFB's analysis found that retirees across every income quintile are projected to receive at least as much in benefits as they paid through their own and their employers' payroll taxes. For lower-income retirees, the difference is particularly large.

So who is covering the gap? Not a secret boomer savings account. Today's workers are.

The worker-to-retiree ratio is getting squeezed

Back in 1950, there were more than 16 covered workers for every Social Security beneficiary. By 1960, that had dropped to roughly five workers per beneficiary. Today, it's around 2.7 workers per beneficiary.

And that number is expected to keep falling toward roughly two workers for every beneficiary in the coming decades.

Think of it like splitting a restaurant bill. If 16 people are splitting the cost of one person's dinner, the individual burden isn't particularly painful. If only two people are left holding the check, things get way less funny. That's essentially what is happening to Social Security's financing structure.

Boomers didn't break the system by themselves

It's tempting to turn this into a generational fight: Boomers are getting the checks, millennials are paying the taxes, everybody yells at everybody. But that's not really what the numbers say.

Baby boomers did not invent Social Security's pay-as-you-go structure. And they're not the first generation to receive more in benefits than they paid into the program. Earlier generations benefited from an even more favorable worker-to-retiree ratio. Boomers also spent decades paying payroll taxes that helped build the trust fund surplus that is now being used to support benefits.

The real issue is that the demographic math that made the system work so comfortably decades ago isn't there anymore. People are living longer, birth rates are lower, and the huge baby boomer generation is moving through retirement while smaller generations are coming behind it. The system has essentially reached the point where there aren't enough people behind the biggest generation to make the old math work as easily.

Source: FORTUNE