This Week:

Quote of the Week

Social Security Crisis III: The Baby Boomers Are Retiring!

Baby Boomers, Workers, and Babies

Social Security Crisis IV: Trillions of Dollars of Unfunded Liabilities!

Greetings,

Last week I pointed out that proponents of privatization like to say that the system is going BANKRUPT, and that there is NO TRUST FUND.  Neither are true.  Two other not-true things they like to say are: The BABY BOOMERS are going to break the bank! and ... The system has TRILLIONS OF DOLLARS IN “UNFUNDED LIABILITIES.”  This week I take a look at the Boomers and the Trillions.  This is not the end of the “Social Security 2005" series, by any means.

OK, I'm outta room.  Gotta go.

Nygaard

"Quote" of the Week:

Here's former Social Security Commissioner Robert Ball (again!), from his paper “The Nine Guiding Principles of Social Security:”

“The time frame of 75 years that is now used for Social security estimates is much longer than that used in almost all other contexts, from foreign social insurance programs to federal budgeting.  The point, then and now, was not to try to pretend that anyone could really know precisely what would be happening in 75 or 25 years; the point was that the planners of Social Security in making exceptionally long-term commitments, wanted always to be looking far enough ahead to anticipate necessary improvements and make needed changes in ample time to preserve the integrity of the program.”

Social Security Crisis III: The Baby Boomers Are Retiring!

President Bush and his pals say a lot of things in order to get people to believe that Social Security is facing a “crisis.”  Last week I talked about two of the things they like to say: The SYSTEM IS GOING BANKRUPT! (It's not.), and THERE IS NO TRUST FUND! (There is.)

Another rhetorical weapon in the “Social Security is in crisis” arsenal is that the huge generation of Baby Boomers will start retiring soon, and the system just can't handle that, no way no sir!  The New York Times (All The News That's Fit To Print!) of April 29th, for instance, described what they called “the most politically explosive aspect of the debate” about Social Security, which is “the benefit cuts or tax increases needed to balance the system's books as the baby boom generation ages and life expectancy increases.”  If you go to the websites of pro-privatization groups, the rhetoric is more inflammatory than that.

So, is there anything to these worries about the “Baby Boom” generation?  There's a little something to it, but not much.  First of all, I will quote economist Dean Baker, writing in the May 5th edition of “Economic Reporting Review.”  He said:

“Actually no benefit cuts or tax increases will be needed to cover the costs of the baby boomers aging, since this event had already been covered by the 1983 [Greenspan Commission] reforms.  The Social Security trustees project that the program will be fully solvent until 2041, at which point the youngest baby boomer will be age 77 and the oldest will be age 95.  The non-partisan Congressional Budget Office projects that the program will be able to pay all benefits through the year 2052, at which point the youngest baby boomer will be age 88 and the oldest will be 106.”

Too Many Retirees, Not Enough Workers?

So, we've basically already taken care of the Baby Boomers with reforms enacted 22 years ago.  But still, those who want to privatize the system talk of another looming crisis.  Here's the Heritage Foundation, in an article ominously titled “Social Security's Inevitable Future:”

“Back in 1950, as the baby boom was just getting started, each retiree's benefit was divided among 16 workers.  Taxes could be kept low.  Today, that number has dropped to 3.3 workers per retiree, and by 2025, it will reach – and remain at – about two workers per retiree.  Each married couple will have to pay, in addition to their own family's expenses, Social Security retirement benefits for one retiree.  In order to pay promised benefits, either taxes of some kind must rise or other government services must be cut.”

The dishonesty of this argument is eloquently explained by former Social Security Commissioner Robert Ball, who reminds us that the Social Security crisis-mongers have “exaggerated the problem” in various ways:

“The first [way they've exaggerated the problem] is to present the drop in the workers-to-beneficiary ratio as very large and unplanned for.  They point out that in 1950 there were 16 workers paying into the system for each beneficiary taking out, and that the ratio has gone way down so that now the ratio is only 3.3 workers to each beneficiary and in the long run it will be only 2 to 1 or even 1.9 to 1.  They ignore the fact that in 1950 only about 15 percent of the elderly were eligible for benefits and that it was expected by all who were acquainted with the program that the ratio would, of course, change dramatically as a greater proportion of the elderly became beneficiaries.

“Instead, the impression is left that the program was sound only when 16 paid in for every one taking out.  Thus, of course, when the ratio changed to 3.3 to 1, the program became ‘unsustainable.' What in fact happened is that when just about all the elderly first became eligible for Social Security benefits – about 1975 – the ratio was 3.3 contributors to each beneficiary and the ratio has stayed that way for the past 30 years.  As the baby boom reaches retirement age, as the administration says, the ratio is expected to drop for the long run to 2.0 or 1.9 workers to each retiree.  But that is the size of the problem – a drop from 3.3 to 2 workers per retiree.  The much-used 16-to-1 figure is simply a reflection of the immaturity of the system back in 1950 when very few of the elderly had worked under the program long enough to be eligible for benefits.”

But there is an even larger problem with the “not enough workers” scare tactic, as the next article will illustrate.

Baby Boomers, Workers, and Babies

There is more to the issue of “retiring Baby Boomers” than the number of workers to retirees.  Allow me to talk about something called the “Dependency Ratio.”

The “Dependency Ratio” is the ratio of workers to “non-workers.”  (And by “non-workers” I mean people who are not earning wages in the labor market.  Lots of people obviously work hard and don't earn wages, like mothers, but we'll leave that aside for the current discussion.)

It's just a fact that, at any given time, in any given society, the economic producers have to support the economic consumers.  What gets forgotten (or intentionally omitted) in the Social Security debate is the fact that retirees are not the only people that have to be supported by current workers.  The other large group of “dependents,” as you may have figured out, is children.  There are thus two ratios to consider: the first one is the “old age dependency ratio,” and the second one is the “youth dependency ratio.”  Together they make up the “overall dependency ratio.”  (Obviously, people unable to work due to disability are also a part of the equation, but the numbers that fluctuate the most are age-related, so that's what I'm looking at here.)

When you broaden your perspective and look at the overall dependency ratio – and not just the old age dependency ratio – you see some very interesting things.  The most interesting thing is that we had fewer workers per non-worker in the 1960s – when the Baby Boomers were kids – than we can expect to have in 2050, when the Baby Boomers are retired and the “crisis” is supposed to be in full bloom.

Hard to believe?  OK, here are comments from a few people who know a lot more about this than I do (Warning!  Lots of numbers coming up!  But they won't last long.)

First up is that radical, Marxist group called the Census Bureau, writing in their report “Current Population Reports 1995 to 2050”:

“The dependency ratio indicates how many children (0 to 17 years) and elderly (65 years and over) there would be for every 100 people of working age, 18 to 64 years. [Our] projections indicate the dependency ratio would slowly decline from its 1995 level (63.7) to 60.2 in 2010. Then, as people born during the Baby Boom begin to reach age 65, this ratio is projected to increase to 68.2 by 2020, 78.7 by 2030, and 79.9 by 2050.  At no time through 2050 would the dependency ratio be as high as that which existed in the 1960's because of the large number of children (born during the Baby Boom)  (table E, figure 6)”

Second, here is Ronald Lee, Director of the Center for the Economics and Demography of Aging at the University of California, Berkeley, who speaks here of what happens after a Baby Boom ends (which he calls a “demographic transition”):

“What are the effects of this demographic transition on the population age distribution? … Eventually fertility begins to decline, and the child dependency ratio then goes through a prolonged period of decline and finally the old age dependency ratios begins to pick up in earnest because of the fertility decline. We then have this really quite dramatic increase in the old age dependency ratio matching a dramatic decline in the youth dependency ratio.  We end up with a higher proportion of elderly than of kids. We are getting close to that point in the U.S. … [The] total dependency ratio is ending up at about the same place where it started.”

And finally, here's economist Doug Orr, writing in the November/December 2004 issue of “Dollars & Sense” magazine:

“In the 1960s we had 1.05 workers for each dependent, and we were building new schools and the interstate highway system and getting ready to put a man on the moon.  No one bemoaned a demographic crisis or looked for ways to cut the resources allocated to children; in fact, the living standards of most families rose rapidly.  In 2030, we will have 1.27 workers per dependent.  We'll have more workers per dependent in the future than we did in the past.  While it is true a larger share of total output will be allocated to the aged, just as a larger share was allocated to children in the 1960s, society will easily produce adequate output to support all workers and dependents, and at a higher standard of living.” [Editor's note: This has to do with ever-increasing productivity, a subject I will address in a future Nygaard Notes.]

To put it simply, what is facing us in the coming decades is larger than Social Security.  What we, as a society,  need to work out is the appropriate allocation of resources, not whether or not we will have “enough” wealth to care for our population.  How we choose to allocate those resources – between old and young, rich and poor, men and women, majority and minority – is the real issue facing us.  Social Security is only a part of that larger decision.

Social Security Crisis IV: Trillions of Dollars of Unfunded Liabilities!

It is often said that Social Security has “unfunded liabilities” estimated at $3.7 trillion.  The Bush White House even uses the number $10 trillion.  Holy cow! $3.7 TRILLION! $10 TRILLION!  There must be a crisis!  Right?  Let's have a look.

When you hear or read the phrase “Unfunded liabilities,” what people are talking about is the difference between the money that Social Security has promised to pay out in benefits over the next 75 years and the money that Social Security has and will have available to pay those benefits.  It's true, these liabilities mean that some changes have to be made in the Social Security program or else the system will not balance, and people won't get their full benefits a few decades from now.  That's all well and good.  The problem comes when these facts are talked about as if they are evidence of a “crisis” facing the system.

It's hard not to think it's a crisis when you hear numbers like $3.7 trillion, or $10 trillion.  (The reason there are such different numbers is that the $4 trillion is the shortfall over the 75-year planning period, while the $11 trillion is supposedly the shortfall when you project into infinity.  I'm not making this up!)

Nobody really understands what a “trillion” means, since it's just too big a number.  It's so big, the propagandists figure, that if they can get people to focus on trillions, they'll get so freaked out that they'll believe we need a really radical change.  Like privatization.  Let me give some perspective that might help make these “trillions” somewhat comprehensible:

* According to the conservative estimates of the Social Security Trustees, the U.S. economy (that is, the Gross Domestic Product, or GDP) over the next 75 years is expected to add up to about $667 trillion (that's $667,000,000,000,000.00).  $4 trillion, while it is a huge number, is a mere 0.6 percent of this amount.  In other words, if we were to devote 6/10 of one percent of our national wealth over the next 75 years to supporting our retirees and people with disabilities and survivors of deceased workers at current levels, the system would be in balance.  For a minimum-wage worker, that's about $1.24 per week.  For an average-income household, that's about $4.50 per week.

* The Bush tax cuts of 2001 and 2003, if made permanent, would add up to more than three times as much (1.99 percent of GDP ) as the Social Security shortfall (0.6 percent).

*  A couple of months ago, the Center for Economic and Policy Research released a study showing that “the impact of excessive health care cost growth (cost growth that exceeds per capita GDP growth) on living standards over just 30 months will be as large as the impact of the tax increase that the Social Security trustees project will be needed to keep Social Security solvent” for the next 75 years.

There are other projections (such as those from the Congressional Budget Office) that show the shortfall to be much less than the Social Security Trustees.  And there are other problems with the projections of the Social Security Trustees.  But that's a subject for another Nygaard Notes.