Whenever the topic of Social Security solvency comes up, the consensus is that benefits for future generations have to be cut, mainly because of two reasons:
- People are living longer.
- There are more people retiring than people contributing to the system.
I understand the first reason, but the second doesn't make sense to me, mathematically speaking: the retirement of an older generation should not be affected by the number of contributors in the younger generation.
In simplistic terms, if the older generation is composed of 100 people, those 100 people paid payroll taxes during their working years, so by the time they retire, there should be 100 people's worth of reserves to fund their retirement. The number of contributors in the younger generation is irrelevant.
Inflation should not be a factor either since, at least in the United States, reserves are invested in intra-government bonds.
So, why do I constantly hear the retiree to contributor ratio as a reason why Social Security benefits will have to be cut for future generations?