Social Security Reform: Examining its Viability in its Current and Future State

Aaron Chou
Jade Kok
Econ 125
Tayman
November 10, 2011


Social Security is akin to a criminal fraud. Mitt Romney

[Social Security] is a Ponzi scheme for these young people. The idea that they're working and paying
into Social Security today, that the current program is going to be there for them, is a lie. Rick Perry

With presidential elections fast approaching in the next year, several issues loom large on the
American public. Certainly, job creation and a stagnant economy are on the forefront of concern.
However, in recent Republican candidate debates, Social Security reform has also been a hot topic. As
the giant Baby Boom generation enters retirement, our country faces an immense increase in senior
citizens eligible for Social Security benefits. At the same time, stagnant fertility rates have failed to
substantially increase our labor force, raising concerns over the nations ability to fund the countrys
Social Security system in the future. As such, we face extraordinary increases in the ratio of seniors to
working age residents (Myers 4). In order to compensate for this increase, fundamental changes must be
made to both the current Social Security system and public policy, namely increasing the current
retirement age, reducing benefits to retirees who do not need it, and encouraging immigrants to come to
America to increase the nations labor force.
Workers pay a tax that funds Americas Social Security system. These funds are then used to
support eligible retirees. As such, the best way to divide the age distribution is into two segments: those
working and those retired. Citizens are eligible to work at the age of 15 and eligible to retire at 65,
effectively creating an age distribution of eligible workers being between the ages of 15-64, and retirees
to be ages 65+. The distribution is the relative numbers of eligible retirees to eligible workers, and is
called the elderly age-dependency ratio (Siegal 596). There are many advantages to this ratio. It gives us
an indicator of how many eligible workers we have contributing to support every eligible retiree.
Furthermore, it is a reflection of three demographic factors: fertility, life expectancy, and net
immigration. All three play a major role in the feasibility of our current Social Security system. Fertility
reflects how many more eligible workers will be bornfifteen years after their birth of course--while
life expectancy reflects how many eligible retirees will stay alive to collect benefits. Migration also
plays a great factor in increasing our labor force. However, there are some short-comings to the elderly
age-dependency ratio. Not all people retire at the age of 65. Some retire before, some after. This also
applies to the workforce. Not everyone from the ages 15-65 is part of the workforce, as many choose to
stay in school. As such, simply dividing the number of people over the age of 65 by the number of
people from the ages 15-64 does not paint the most accurate picture of how many workers America has
to support its retirees. It is merely the eligible workers and retirees, not the actual workers and retirees.
In our paper, we will consider the workforce age distribution to be 25-65. The rationale behind this is
simple. While there are those who begin working at the age of 15, it is for wages that would contribute
minimally to Social Security (Myers 2). Many people choose to go to college upon graduating from high
school, in which they usually find a job afterwards. Granted, there are those who opt not to go to college
and instead begin working at age 18, but also those who choose to pursue a higher education in the form
of graduate studies. Nevertheless, 25 is a reasonable age to be considered as the start of the prime
working years. We will then consider all of those over the age of 65 to be retirees. Some citizens choose
to retire earlier than 65, and some continue to work well into their 70s. Having said that, 65+ is a
reasonable age group to use as retirees for the elderly age-dependency ratio.
Projections of the elderly age dependency ratio heavily depend on assumptions made on fertility,
migration, and life expectancy. Applying the elderly age dependency ratio on population projections
provided by Professor Tayman,, ratio projections vary greatly. Looking at Figure 1.1, in assuming no net
immigration, middle projections for total fertility rate and life expectancy of 2.219 84.0 respectively, by
2040 America can expect to have 459 retirees per 1000 workers, compared to 331 per 1000 in 2020.
This is an increase of 38.7%. Compare this to the most optimistic projection based on high life

Figure 1.1 Source: Based on Taymans US Projections 2010-2050 Figure 1.2
expectancy, total fertility rates, and net immigration labeled in Figure 1.2. America can expect to have
380 retirees per 1000 workers by 2040, compared to 314 retirees per 1000 in 2020, an increase of only
21.0%. Low and mid projections forecast an increase of 34.7% and 29.1% respectively. The reason for
this discrepancy is due to the assumptions made on fertility, life expectancy, and net immigration. With
higher fertility projections, one can expect a larger work force to support Social Security beneficiaries.
This more than offsets the increase in eligible retirees due to longer life expectancy. When net
immigration is projected to be zero, the elderly age dependency ratio is highest. This reflects the
importance of immigration for an aging country such as America; an absence of immigration would put
a heavy burden on current workers as the number of retired Baby Boomers skyrockets between 2020 and
2030. Based on Figure 1.1, the most favorable outlook to the Social Security system would be the high
projection. High levels of fertility and net immigration rates would boost Americas work force,
alleviating the burden caused by a skyrocketing amount of eligible retirees. On the other side of the
spectrum, the least favorable outlook would be assuming no net immigration. A combination of a
depleting workforce without immigrants to supplement it and an increasing number of retirees would
only lead to a higher elderly age dependency ratio.
It is not only important to look at the amount of these changes, but also the nature of them, and
their rate of change. Namely, why the skyrocketing increase from 2020-2030? During this time period,
most Baby Boomers born in 1955-1965 will now be reaching the retirement age of 65, all becoming
eligible beneficiaries of Social Security. At the same time, the pressure is felt by the generation with
much lower birth rates and thus a smaller cohort of laborers, the Baby Boomers offspring. This giant
increase tails off however, as it is assumed most of the Baby Boomers will have passed away by 2040
going into 2050. Nevertheless the combination of two demographic extremes leads to between a 21.0%
to 38.7% increase in the elderly age dependency ratio based on the assumptions in Figure 1.2. What
could be the most likely projection to occur?
First we examine the Total Fertility Rate. Our generation is considered the Baby Boomlet, a
relatively large birth cohort compared to the Baby Bust. According to Richard Easterlins theory,
members of large birth cohorts are expected to have relatively small numbers of children (Easterlin 399).
Current social changes have also contributed to the rising number of women pursuing higher education
and careers. This may be another factor that leads to the decrease in fertility rate. An increase in women
joining the work force commonly delays marriages, resulting in women having fewer children, or none
at all. The current economic climate may be a factor as well. The Great Recession has provided more
incentive for women to pursue higher education and to find work in order to support themselves well
before thinking of starting a potential family. Indeed, when the economy is bad, people are less inclined
to have more children because as Easterlin argues, they fail to meet their lifestyle aspirations and marry
much later (Tayman 89). So it makes most sense that over the next few decades, we will see a low
fertility rate. Therefore, the decrease in TFR from 2.056 in 2010 to 1.8 in 2050 is most plausible. When
examining net immigration numbers, the most reasonable alternative is the middle projection of
984,000. Currently, in a slow economy, America can expect to have net migration decrease slightly from
1,200,000 in the next decade. A slowing economy explains a decrease of net migration in the United
States. Many economists see parallels between America and Japan during the Lost Decades, where
Japan has had a stagnant economy after its collapse in the early 1990s. In the low series population
projection, the assumption is that net migration will decrease by 85.9 percent, which is a severe drop.
The more likely outcome is the middle series projection in which net migration will decrease by
eighteen percent, which is a more reasonable estimate. In the past sixty years, there has been a steady
increase in immigration*, however, this rate of increase is likely to slow down. The U.S. is not as
attractive to foreigners as it was fifty years ago. The final demographic factor to evaluate is life
expectancy. Many researchers believe that life expectancies at birth are likely to level off at around age
85 (Tayman, 67). Society has been making efforts to promote healthier living, but it does not have
control over whether people actually make these healthier decisions. In addition, medical and
technological advancements, no matter how grand, would only have a small marginal effect on life
expectancies. In this case, the middle series projection, again, provides the most likely outcome. Life
expectancy will increase from 77 to 84 in the next forty years.
The current Social Security system problem is that there are not enough working people to
support the growing number of dependent retirees and elderly people. As the role of the president, I
would implement three strategies to combat this issue. I would increase the retirement age from 65 to
67, reduce benefits to retirees that may not necessarily need as much as others, and encourage
immigration to increase the labor force. Raising the retirement age by two years gives the economy two
more years per working person of taxes and Social Security funds. Later on, the retirement age may be
increased again to 70 due to increased life expectancy. If people are living longer, they should be
working longer. What policymakers must recognize is the inherent problem of Social Security is the
elderly age dependency ratio. Any policy not working to decrease that number is putting off the
problem. The idea of borrowing more money to pile on more debt and unfunded liabilities is a poor
policy choice. An effective measure would be reducing the benefits of certain groups of people, where
the reductions will be smaller for lower earners, and larger for higher ones (Diamond and Orszag 4).
Economists call this the diminishing marginal return of income. These benefits slashes will be based on
historical earnings, as some retirees simply do not need as many benefits as others. As an extreme
example, when Bill Gates becomes an eligible retiree at 65, his marginal utility gained from Social
Security benefits will not be as high as that of the average retired 65 year-old man. By cutting the
benefits of a certain demographic, the size of eligible retirees is effectively made smaller. Another
solution is to somehow increase the labor force. One solution to a diminished workforce is immigration
to fill labor needs (Myers, 2). I would encourage immigration with the goal of increasing the young,
working population. Then, the additional tax revenue generated from these working people will benefit
the Social Security system.
It is clear a Social Security program designed based on a much different American demographic
during the 1930s is not applicable to todays day and age. This calls for slight modifications due to
different fertility, life expectancy, and immigration rates that will continue to change as Americas
demographic changes. A dynamic Social Security system that accurately accounts for its demographic
will be the most successful. Whatever presidential candidate recognizes what John F. Kennedy
recognized this nearly fifty years ago will have a winning Social Security plan (Boskin 1). In todays era
of political gridlock and ineptitude, it may look like a long shot. But as we approach next years 2012
elections, the importance of Social Security reform will only grow.





Works Cited

Boskin, Michael J. Straight Talk on Social Security Reform. The Economists Voice. 2005. 5
November 2011.

Diamond, Peter A. and Peter Orszag. Saving Social Security: The Diamond-Orszag Plan. The
Economists Voice. 2005. 3 November 2011.

Easterlin, Richard A. "What Will 1984 Be Like? Socioeconomic Implications of Recent Twists in Age
Structure." Demography 15.4 (1978). Print.

Myers, Dowell. Testimony before the House Committee on the Judiciary Ellis Island, New York, and
New Jersey. Washington D.C. 30 March 2007.

Rockefeller: Cited in David Simcox, "The Commission on Population Growth and the American Future:
Twenty Years Later: A Lost Opportunity," in the Social Contract (Summer 1992): 197.

Siegel, Jacob S. "Outlook for the Social Security Retirement System." Applied Demography
Applications to Business, Government, Law and Public Policy. Bingley: Emerald, 2008. 596-605. Print.

Smith, Stanley K., Jeff Tayman, and David A. Swanson. State and Local Population Projections:
Methodology and Analysis. New York [u.a.: Kluwer Acad., Plenum Publ., 2001. Print.