Skip to main content

by Dean Baker

The Very Serious People in Washington have been running around arguing that the country should be very worried about the aging of the population. The story is that we face an enormous crisis because the ratio of workers to retirees is projected to fall from 2.8 to 1 in 2013 to just 2.0 to 1 over the next two decades. This declining ratio is supposed to mean that our children will face an enormous burden in supporting a rapidly growing population of retirees.

While this projection produces much hand wringing and head nodding among the Very Serious People (VSP), fans of arithmetic know that it provides little basis for concern. The reason for the lack of concern is often given by the VSPs themselves. When pushing the scare story they often throw in the tidbit that the ratio of workers to retirees used to be 5 to 1 back in the 1960s.

Of course the country is far richer on average today than it was in the 1960s even though we have much lower ratio of workers to retirees. The secret is productivity growth. Output per worker hour is more than twice as much in 2013 as it was in the 1960s. As a result, we can both have a larger share of output diverted to supporting retirees and have higher living standards for both workers and retirees.

The same story holds going forward. In 20 years average output per worker is conservatively estimated to be more than 40 percent higher than it is today. This means that even if workers were to see an increase in their payroll tax of 2 or 3 percentage points (almost certainly more than would actually be the case – we can also raise the cap on taxable wages) they would still have much higher after-tax wages in 2033 than they do today.

Furthermore, the longer-term story looks even brighter. After 2030 the demographic picture actually improves slightly as us pesky baby boomers die off and then is projected to worsen very gradually through the rest of the century as the life expectancies continue to rise.

This means that the gains of productivity growth will be able to go to active workers in these decades with no additional burdens due to demographics. That would mean wages could rise by another 15 percent by 2043 and another 15 percent on top of this by 2053. There is nothing close to the story of impoverishing our children pushed by the VSPs.

At this point alert readers are jumping up and down yelling that most workers have not been seeing the gains of productivity growth over the last three decades due to the upward redistribution of income over this period. If this trend continues then workers will have little increase in before-tax wages to offset any tax increases that might be needed to support Social Security.  

This is completely true and precisely the point. The real threat to our children’s living standards has nothing to do with the possibility that Social Security might require additional tax revenue in the decades ahead. The threat to their living standards is the risk that the upward redistribution of the last three decades will continue for the decades into the future. If this proves to be the case, then the top 1-2 percent of the population will get almost all of the gains of economic growth and most of our children and grandchildren will see nothing.

That is why the obsessive focus of the VSPs on the demographics is so pernicious. It distracts the public from the issues that are most important to their living standards and the living standards of their children and grandchildren. Furthermore, if they accomplish their stated goal, they will undermine one of the few sources of security that ordinary workers still enjoy in today’s economy.

So next time you hear someone giving you a solemn lesson on the demographics of Social Security tell them to learn a little arithmetic. Maybe if the VSPs picked up an old textbook we could have a more informed debate.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The End of Loser Liberalism: Making Markets Progressive. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues.

Originally posted to Social Security Defenders on Fri Mar 29, 2013 at 08:00 AM PDT.

Also republished by Progressive Policy Zone.

EMAIL TO A FRIEND X
Your Email has been sent.
You must add at least one tag to this diary before publishing it.

Add keywords that describe this diary. Separate multiple keywords with commas.
Tagging tips - Search For Tags - Browse For Tags

?

More Tagging tips:

A tag is a way to search for this diary. If someone is searching for "Barack Obama," is this a diary they'd be trying to find?

Use a person's full name, without any title. Senator Obama may become President Obama, and Michelle Obama might run for office.

If your diary covers an election or elected official, use election tags, which are generally the state abbreviation followed by the office. CA-01 is the first district House seat. CA-Sen covers both senate races. NY-GOV covers the New York governor's race.

Tags do not compound: that is, "education reform" is a completely different tag from "education". A tag like "reform" alone is probably not meaningful.

Consider if one or more of these tags fits your diary: Civil Rights, Community, Congress, Culture, Economy, Education, Elections, Energy, Environment, Health Care, International, Labor, Law, Media, Meta, National Security, Science, Transportation, or White House. If your diary is specific to a state, consider adding the state (California, Texas, etc). Keep in mind, though, that there are many wonderful and important diaries that don't fit in any of these tags. Don't worry if yours doesn't.

You can add a private note to this diary when hotlisting it:
Are you sure you want to remove this diary from your hotlist?
Are you sure you want to remove your recommendation? You can only recommend a diary once, so you will not be able to re-recommend it afterwards.
Rescue this diary, and add a note:
Are you sure you want to remove this diary from Rescue?
Choose where to republish this diary. The diary will be added to the queue for that group. Publish it from the queue to make it appear.

You must be a member of a group to use this feature.

Add a quick update to your diary without changing the diary itself:
Are you sure you want to remove this diary?
(The diary will be removed from the site and returned to your drafts for further editing.)
(The diary will be removed.)
Are you sure you want to save these changes to the published diary?

Comment Preferences

  •  Perfect timing (18+ / 0-)

    I'm so glad that you wrote about this since the Fix the Debt cabal has switched from fearmongering about debt to the "moral" argument about who will save the children.

    This is completely true and precisely the point. The real threat to our children’s living standards has nothing to do with the possibility that Social Security might require additional tax revenue in the decades ahead. The threat to their living standards is the risk that the upward redistribution of the last three decades will continue for the decades into the future. If this proves to be the case, then the top 1-2 percent of the population will get almost all of the gains of economic growth and most of our children and grandchildren will see nothing.

    That is why the obsessive focus of the VSPs on the demographics is so pernicious. It distracts the public from the issues that are most important to their living standards and the living standards of their children and grandchildren. Furthermore, if they accomplish their stated goal, they will undermine one of the few sources of security that ordinary workers still enjoy in today’s economy.

    If they really cared about our children they would not be attacking education and other programs with their destructive austerity agenda.  


    "Justice is a commodity"

    by joanneleon on Fri Mar 29, 2013 at 08:06:58 AM PDT

  •  Thank you, Dean Baker (13+ / 0-)

    for contributing to the Social Security Defenders blogathon!



    "HandsOffMySS" Blogathon: March 25th thru March 29th, 2013
    Diary Schedule - All Times Eastern Standard



    IT IS TIME TO TAKE A STAND

    Social security is a concept enshrined in Article 22 of the Universal Declaration of Human Rights which states that Everyone, as a member of society, has the right to social security.

    A limited form of the Social Security program began, during President Franklin D. Roosevelt's first term, as a measure to implement "social insurance" during the Great Depression of the 1930s, when poverty rates among senior citizens exceeded 50 percent.

    Let your voice be heard.

    Members of the Daily Kos group Social Security Defenders have organized this bogathon to promote the truth about the financial condition of the Social Security trust fund, and the impacts of various so called reforms and fixes.

    Understanding how benefits are calculated, the History of Social Security, where the Wisconsin Idea came from, and how over the years changes have been made to Social Security, all increase awareness and hopefully improve the discussion.





    • Monday, March 25th

    11:00am:Roger Fox
    1:00 pm: Joan McCarter
    3:00 pm: Roger Fox
    5:00 pm: KitsapRiver

    • Tuesday, March 26th

    11:00am: joanneleon
    1:00 pm: joe shikspack
    3:00 pm: Arshad Hasan DFA
    5:00 pm: Roger Fox

    • Wednesday, March 27th

    1:00 pm: teacherken
    3:00 pm: Jamess
    5:00 pm: Bruce Webb

    • Thursday, March 28th

    1:00 pm:
    3:00 pm: One Pissed Off Liberal
    5:00 pm: floridagal

    • Friday, March 29th

    10:00am:Roger Fox
    11:00 am: Economist Dean Baker
    1:00 pm: VCLib
    3:00 pm: Armando
    5:00 pm: Liberal Thinking


    Please remember to republish these diaries to your Daily Kos Groups.  You can also follow all postings by clicking this link for the Social Security Defenders Blogathon Group. Then, click 'Follow' and that will make all postings show up in 'My Stream' of your Daily Kos page.

    Photobucket


    "Justice is a commodity"

    by joanneleon on Fri Mar 29, 2013 at 08:12:22 AM PDT

  •  The Social Security payout is already below (7+ / 0-)

    the poverty line. So why does Obama think you can make do with less?

     But hey, Obama needs money for the next war his is scheming and the one he can't bring himself to finish. Hobbies can be expensive you know. The money has to come from somewhere.

    Photobucket

    "It is the world that has been pulled over your eyes to blind you from the truth." - Morpheus

    by CitizenOfEarth on Fri Mar 29, 2013 at 08:12:44 AM PDT

  •  VSPs, hehe (12+ / 0-)

    In a rational world, Dean Baker would be a VSP, like Treasury Sec or something.

    Thanks for this series.

  •  Dependency Ratios: Aged vs Total (7+ / 0-)

    http://www.ssa.gov/...

    Dean could have made the argument about 'Covered Worker Ratios' even stronger, but maybe at the risk of distracting from his Productivity argument. The above Table from the 2012 Report shows two different metrics for Dependency Ratios (the ratio of non-working age people to working age) which is to say Aged and Total. The Aged column is a reasonable proxy of the much cited Worker-Retiree Ratio and does show a shift over time which however never quite gets to 2:1. But the Total column adds in Children and so gives the actual number of dependents per working age adult and from that metric we will NEVER get back to the Total Dependency Ratios seen in the 1960s.

    That is workers in the future will be supporting more retirees but also correspondingly less children. Which is only logical, those 60s children are the same Boomers as those 2030 retirees, it is the same demographic pig moving through the societal python.

    And you could layer over this the fact that more working age adults are participating in the workforce than in the 60s, there really were one income middle class households then. Today not so much. And THEN add in Productivity over all that and the whole inverted demographic pyramid argument falls apart.

    socialsecuritydefender.blogspot.com - SocSec.Defender at gmail.com - founder DK Social Security Defenders group - (hmm is there a theme emerging here?)

    by Bruce Webb on Fri Mar 29, 2013 at 08:31:03 AM PDT

    •  Maybe (0+ / 0-)

      First, the ratio that matters is people paying into the system versus people receiving benefits. It is driven largely by the age structure but not entirely since there are beneficiaries who are children, and of working age, and of course not everyone of working age is in fact working.

      Here's the worker to beneficiary ratio from the Trustees report, and it does get to 2.0 by 2035 (in the "intermediate scenario).

      Second, whether having more older people to support but fewer children to support is a net gain depends entirely on how expensive those two "dependent" populations relative to each other and how expensive they are relative to the past.

      If we have fewer children but they are each more expensive to raise than in the past , and we have more elderly people and they are more expensive to support than in the past, how does this net out?

      It is not only the number that matters but time. 0-18 is 18 years. That is not changing. But the period of time in retirement has been increasing (earlier retirement and longer life combined) and is expected to increase. Another way to say this is that the over 65 population is considerably older than it was in the past. And now we think the period of young people's dependency is increasing as well as entry into the labor force seems is being delayed.

      Any information you have about the relative cost of these two "dependent" populations would be much appreciated, but based on just population ratios this tells us very little.

      •  Well that is the point (7+ / 0-)

        the crisismongers NEVER say 'beneficiaries'. They ALWAYS frame it in terms of poor Gen-X workers laboring at three jobs to pay for greens fees and Lexus payments for Greedy Geezers.

        If I had a nickel for every time that people said that the 'worker retiree ration had gone from 5 to 1 in 1960 to a projected 2 to 1 in 2040' I would be out buying rounds at the sports bar right now. Instead they carefully glide from 'beneficiaries' to 'retirees' assuming, and correctly that most people just won't think of the survivors and disabled that go into those 'beneficiary' numbers.

        And time in retirement hasn't increased as much as most people suggest. The Social Security Tables provide figures for life expectancy at birth AND life expectancy at age 65. All in the same Tables. Yet once again the crisismongers ALWAYS cite the former numbers to 'prove' that people are living 17 years in retirement instead of dropping dead at age 65 like they did in 1936. In reality the improvement for people at FRA is 5 years for men and 7 years for women.

        There are honest discussions to be had about the demographic challenges facing Social Security. But the 'reformers' don't seem particularly interested and instead swing between cherry picking and selling apples for oranges comparisons.

        Kind of a fruit market of mendacity.

        socialsecuritydefender.blogspot.com - SocSec.Defender at gmail.com - founder DK Social Security Defenders group - (hmm is there a theme emerging here?)

        by Bruce Webb on Fri Mar 29, 2013 at 01:46:47 PM PDT

        [ Parent ]

        •  Do you think I am a crisis monger? (0+ / 0-)

          My big problem with the way social security is discussed here is that you are either a stalwart defender who doesn't dare mention that we have any kind of fiscal issue, no matter how modest, or you are a crisis-monger, pernicious destroyer, blah blah blah.

          I agree there are a lot of lairs who want to undermine the system .there are also plenty of realists who say facing the real but modest problems is worth talking about and getting right.

          I think I was making an cogent and somewhat useful point. Then you responded to all the lying crisis mongers.

          Sure there are lots of liars:

          Most liars who implicate the dependency ratio actually talk about how the system used have 15 workers for each retiree, and now we are 2. They probably have no idea that almost all of that fall was due program growth, not age structure. But we have also paid for the increased cost of the system through economic growth and higher taxes. Its pretty straightforward.

          Liars also don;t understand life expectancy data.

          But lots of "defenders" don't either, sadly

          I think you are mistaken about the growing length of time in retirement. It is not simply about life expectancy increasing but about the age at retirement. Back in 1960 people retired later and lived shorter lives. Now they retire earlier and live longer.

          There is a strong recent trend toward working longer that is probably a positive thing.
          http://bls.gov/...

  •  Paul Krugman echoes (8+ / 0-)

    Dean Baker on the "save our children" meme.

    http://www.nytimes.com/...

    Children can be "saved" by stimulating the economy, addressing the nation's infrastructure, making college more affordable  and  strengthening the public school system. The right wing argument is pure BS, as usual.

  •  Pernicious is as pernicious does (1+ / 0-)
    Recommended by:
    icemilkcoffee

    There are many people who both recognize that Social Security has a long-term imbalance between costs and revenues--driven primarily by demography-- who are not trying to scaremonger anyone. They are not trying to divert attention. They are not trying to justify cutting the program. In fact by highlighting the fact that the problem is basically mechanical, the result of historically high and then sustained lower birth rates, that response to fix it can be just as a mechanical.  We can do exactly what we did from the 1960's through 1980's--raise the payroll tax rate (and as you point out counteract the erosion of system finances that is the result purely of unequal wage growth) and raise the tax cap.

    The system's costs are emphatically not out of control because somehow benefits are growing at unexpectedly rapid rates (for example the way it happened in the 1970's when policy makers mistakenly implemented a double-indexing scheme into the benefit formula during a period of very high inflation). Pointing out that the problem is demographic points out that nothing fundamental needs to change. The system is pretty well insulated from economic shocks for example. (one fix that is needed, however,  is to index the taxable maximum not to wage growth but to wage shares above and blew the threshold). AS yo know there are ways to index against demographic risks as well.

    By contrast, the health care system is clearly fundamentally broken. Cost have risen for reasons that are based on the fundamental flaws of the "system" itself.

    Likewise, the 401k pension system has proven that it is is exposed to massive risks, and has tons of inherent flaws having to do with skewed tax incentives, high fees, too low participation, lack of diversification, and premature access to funds. Saving is not a broken concept, but the 401k system is clearly broken as a means of securing broad levels of retirement security precisely because of policy design.

    There is a big debate ongoing currently about the disability program. It is complicated and has many parts, but fundamentally the question is about whether the program's growth is due primary to entirely expected changes in demographics or to flaws in program design. If it is demographics then we can just allocate a few more dollars of revenue and clam down. If it is program design then we  have to do something else more disruptive.

    Unfortunately the effect of your post here is not to cause people to clam down and pay attention to facts, it is to cause more people to scream at anyone who understands demography.

    •  You don't see the giant hole in your argument. (3+ / 0-)
      Recommended by:
      AoT, aliasalias, Calamity Jean

      That huge demographic hitting the rolls have already paid their share of the burden into the system throughout their working lives.

      "Til you're so fucking crazy you can't follow their rules" John Lennon - Working Class Hero

      by Horace Boothroyd III on Fri Mar 29, 2013 at 11:11:27 AM PDT

      [ Parent ]

      •  The problem is that the social security trust (2+ / 0-)

        was raided and the government is trying to "fix" a problem that was already fixed. There is no problem with Social Security that can't be fixed by paying back what the government raided from it. Of course, we had to go spend that on wars and other shit, but it's still worth doing.

        If debt were a moral issue then, lacking morals, corporations could never be in debt.

        by AoT on Fri Mar 29, 2013 at 11:47:04 AM PDT

        [ Parent ]

        •  Correct. (3+ / 0-)
          Recommended by:
          AoT, Don midwest, aliasalias

          But the 'lets start generational discord' propaganda had to be addressed.

          "Til you're so fucking crazy you can't follow their rules" John Lennon - Working Class Hero

          by Horace Boothroyd III on Fri Mar 29, 2013 at 11:48:43 AM PDT

          [ Parent ]

        •  This is incorrect (0+ / 0-)

          The revenue available for future social security beneficiaries is equal to payroll tax collections, taxation of benefits, and income form the Trust funds built up between 1984-2009. Every dollar in the Trust funds is owed to Social Security beneficiaries, and there is nothing about spending in the rest of the government that can change that.  In other words the bond obligations are real. I am pretty sure Dean baker agrees with this.

          Now you could argue that  the Treasury should have used the proceeds from excess payroll taxes increase national savings or invest more in improving future productive capacity (say by funding all our infrastructure needs). You could argue we should have a more fiscally responsible budget. But nothing about what has gone on in the rest of budget changes the fact that the Trust Fund assets are owed to Social Security beneficiaries.

      •  What do you think happens in 2033? (0+ / 0-)

        1. When Baby boomers retire, most of their benefits will be paid for by current payroll taxes. Interest income is a significant source of revenue and was funded so to speak by excess payroll taxes in the past. but by and large this is still mostly pay as you go. Current workers will pay for current (Boomer) retirees.

        You can see how it works here:
        http://www.ssa.gov/...

        2. The financing shortfall starts in (best guess) 2033 and thereafter. When the Trust fund, built up between 1984-2009, exhausts in 2033 that is when everybody would have to take a ~25% haircut.

        The problem per se is not the baby boom, but that all subsequent generations only have two kids per family. The expectation is that the program is permanently more expensive when there are 2 worker per retiree compared to 3.

        •  This was already fixed until (1+ / 0-)
          Recommended by:
          Horace Boothroyd III

          the trust fund was raided. And there's no reason we can't have a social security system that works even with a population that is getting smaller. Just pull more form the rich.

          If debt were a moral issue then, lacking morals, corporations could never be in debt.

          by AoT on Fri Mar 29, 2013 at 12:58:39 PM PDT

          [ Parent ]

          •  What are you talking about? (0+ / 0-)

            When was it fixed? You should be more specific because makes no sense. Are you talking about 1983 amendments?

            You cannot raid the Trust funds. The bonds held there are backed by the full faith and credit of  the government and they can only be used to pay beneficiaries. Yes the funds deposited in the treasury were used for other expenses, exactly the same way we treat the proceeds of any other bond we sell. But absolutely nothing in that descriptions removes the responsibility of the Treasury to redeem the bonds.

          •  They don't understand. (1+ / 0-)
            Recommended by:
            Roger Fox

            They've swallowed the generation war claptrap.

            "Til you're so fucking crazy you can't follow their rules" John Lennon - Working Class Hero

            by Horace Boothroyd III on Fri Mar 29, 2013 at 01:29:48 PM PDT

            [ Parent ]

  •  Productivity growth and the use of chained- CPI (0+ / 0-)

    So while it is true that the growth in productivity means that we no longer need as many young people to support a certain number of old people, we have to be careful that the COLA adjustment doesn't increase at the same rate as the productivity increase. Otherwise it will wipe out the productivity gains.

    This is a stretch maybe, but I think this actually supports the use of chained-CPI. Because consumers do take note of productivity gains, and they tend to buy products which have the lowest prices thanks to the most productivity gains. For example- the price of a fax machine probably hasn't changed much in the last 20 years, but the price of sending information has plummeted because everyone is doing it with emails now and very few people are still using fax machines. People gravitate to the most productive solutions, and leave behind the less productive ones.

    •  More revenue then higher benefits (0+ / 0-)

      Faster wage growth increases taxes but also causes future benefits to rise. You don't need to implicate COLAs to understand that. The insight is that yes faster wage growth improves finances but the effect is not as much as may be thought because it also raises costs

      Of course, it also raises standards of living, which is obviously good.

      A similar thing happens with higher immigration or higher birth rates. Income rises when more workers enter the labor force, but costs rise when all those worker become retirees. When there are large, and relatively rapid gyrations in these trends, we run into financing issues unless revenue streams adjust accordingly.  

    •  Chained CPI will increase income taxes (0+ / 0-)

      When wages growth faster than Chained CPI.

      ...... Social Security blogathon March 25th thru March 29th. #HandsOffmySS FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

      by Roger Fox on Fri Mar 29, 2013 at 05:48:45 PM PDT

      [ Parent ]

Click here for the mobile view of the site