Social Security May Be Rescued By Baby Boomers

(Dow Jones) Federal Reserve Chairman Ben Bernanke Wednesday urged the government to tackle the challenge of funding Social Security. But here's an idea: Baby boomers, the generation expected to overwhelm the program, may be the workers to save it.

One assumption for the Social Security outlook is that boomers will retire at roughly the same rate as prior generations, lifting the ratio of retirees to workers. According to Social Security projections, there are about 20 retirees for every 100 workers in 2010; by 2030 this elderly-dependency ratio will hit 35. A high dependency rate means the fund will begin paying out more in benefits than it collects in taxes by 2016. The fund's reserves will be depleted by 2037.

The assumption about boomer retirement rates, however, may be flawed. Already, older workers--those 65 and older--are staying in the labor force in higher proportions than before. Data from the Bureau of Labor Statistics show 17% of the senior population is in the labor force, up from about 12% in the 1990s.

Nicole Maestas and Julie Zissimopoulos, economists at the think tank Rand Corporation, say that instead of flattening out, the labor participation rate could continue rising in future years.

Some of the increase will be involuntary: Many baby boomers won't have enough money to retire. The shift from defined-benefit pensions to defined-contribution plans means older workers are staying on the job longer to accumulate enough savings for a comfortable retirement.

Other baby boomers, though, will choose to pursue new careers or part-time employment.

The Rand economists point out that most jobs rely more on cognitive skills than brawn, so older workers can do their jobs successfully longer. Second, the preference of couples to retire together means husbands (who are usually older) work longer as they wait for their wives to retire.

In the two economists' view, the higher participation rate means the dependency ratio will rise only slightly by 2030, giving Social Security more breathing room.

"The change will help on the revenue side of the system," said Zissimopoulos. That's because older workers will still collect their benefits, but they will also be paying into the system through Social Security taxes deducted from their paychecks, thus achieving a better balance between the benefits outflow and tax inflows.

Will there be demand for older workers? Yes, because the U.S. will face a worker shortage by 2018. The BLS projects jobs will increase by 15.3 million slots in the next eight years, but the labor force will grow by only 12.6 million.

Zissimopoulos says changes should be made to pension funds to accommodate the rise in older workers. For instance, older employees who want to transition to part-time work are discouraged from doing so because many defined-benefit pension checks are determined by the last few years of income.

"People should be able to reduce their hours without taking a hit to their pensions," she said. The change would allow them to work--and pay into Social Security--for more years.

Instead of dooming Social Security, boomer workers could ride to its rescue. That will free politicians to tackle the bigger and more immediate entitlement problem: making Medicare solvent.