What’s the best way to think of future demographics — “old-age dependency” or just “dependency”?
Forbes Post, “Social Security, The Dependency Ratio, And Immigration”
Originally published at Forbes.com on June 22, 2018.
Since the release of the most recent Social Security Trustees’ Report earlier this month, there’s been a recognition that 2034 will be here before we know it, and that, subsequent to the depletion of the Trust Fund, when benefits are cut by a quarter, we’ll all regret not having done something sooner. To be sure, my own cynical view is that the Trust Fund mechanism, however “real” it may be, is not what really matters, but rather that the boost in tax receipts from Boomers could have allowed us to build up real assets, or to at any rate, be in a position of a lower federal debt, that we’ll end up with a “Social Security Fix” along the lines of the “doc fix” to pay out benefits at their promised level regardless of Trust Fund balances, and that the greater worry is the Old Age Dependency Ratio, that is, that the combination of decreasing fertility and increasing longevity moving the ratio of working-age adults able to fund the living and medical expenses of the elderly off-kilter. We’ve just started on a trajectory from one retiree for every 5 workers to one retiree for every 3 workers — and, what’s more, this is based on a standardized definition in which “workers” are all adults between the ages of 15 – 64, where, in practice, a significant fraction of this group are still in school, out of the workforce raising children, and so on.
Now, there are a number of proposed “fixes” for this problem, and various countries that are far more worried than the U.S. about this issue are trying to accomplish such changes as greater labor force participation (e.g., more working moms, less travel time to college degrees), more automation/robotics (e.g., as caregivers in nursing homes), and boosts in the country’s fertility rate. And when Germany was faced with the crisis of skyrocketing numbers of migrants coming to the country in 2015, many pundits and politicians saw this as another means of solving its significantly more severe old age dependency crisis, given that the same forecasts of future populations also show a ratio of one retiree for not quite every two workers. To be sure, initial reports were of a highly-skilled workforce of middle-class displaced Syrians, and this is now proving not to be the case, but at the same time, the birth rate in Germany is recovering due to the impact of foreign-born women.
All of which leads to the question of whether, in fact, as MarketWatch columnist Caroline Baum puts it, “immigration is ‘pure gravy’ for federal finances” and “more high-skilled immigrants could help solve Social Security’s shortfall” in the title and subtitle of an article yesterday. Emphasizing that high-skilled immigration is key, she writes:
Increased immigration alone — even a program focused on admitting more high-skilled workers — can’t fix Social Security’s impending insolvency. But it would help.
Extrapolating from the assumptions in the trustees’ annual report, a 30% annual increase in immigration would eliminate 10% of the Social Security shortfall, according to Charles Blahous, who was a public trustee for Social Security and Medicare from 2010 through 2015 and is currently a senior research strategist at Mercatus.
But here’s the problem: immigration isn’t just about changing this ratio. It’s not just about wages and taxes and costs for education and healthcare and ESL lessons. It’s not just about GDP growth. It’s about whether our country continues along its path of division or finds a way to work together for the common good.
After all, the conventional wisdom regarding benefits for the elderly is that we as a country will always keep the spigot flowing because, in the first place, they have time on their hands to vote and to call their representatives and senators, and because, in the second place, even in the absence of the strong elder-revering culture of Asian countries such as Japan or Korea, we as a country will still consider it an obligation to care for those who are unable to care for themselves, seeing our own parents or grandparents in need. But as the numbers of the elderly grow, their needs will increasingly compete with other government funding priorities, especially as young adults and families begin looking to the government to provide free or heavily-subsidized university education, parental leave, and childcare and perceiving this as the norm by looking overseas at European countries which do provide these benefits. Will the next generation of young adults be as willing to accept the conventional wisdom that the elderly come first, if it is even true now in the first place?
And here’s the trouble with seeing immigration as an easy fix: this only works if we can rid ourselves of the us-vs.-them mentality. Consider the latest census data. As reported by Brookings, the ethnic/racial make-up of the United States is forecast to be “minority-majority” in the year 2045; that is, in that year, the non-Hispanic white population, as defined by the Census Bureau, will form less than half the total population of the country. However, because of the relatively young age and higher birthrates of the nonwhite and immigrant populations, there will be “tipping points” for younger ages much sooner. In the year 2020, less than half the population of under-18s will be non-Hispanic white; in the year 2027, the same is true for those in their 20s; in the year 2033, for thirty-somethings; and 2041 for forty-somethings. This means that, in the year 2034 when (per the current forecast) Congress will be (if they dither now) trying to come up with a fix, there won’t just be an age but a racial/ethnic divide, with the seniors whose benefits are at stake predominantly white but young adults and parents of young children nonwhite. Will the younger generation still feel a duty to care for their elders, or will that sense of duty be, if not eliminated, then reduced by a feeling, however much or little it may be articulated, that their elders are not these people worrying about benefit cuts at all? And, conversely, a cohort of (predominantly-white) elderly folk making voting and lobbying decisions may look at the balance between spending on the young and old differently as well and see the issue of education vs. Medicare spending in terms of hardened battle lines rather than needs of equal importance.
By no means am I saying that we should stop immigration because “they” (the newly-arrived immigrants, or nonwhite Americans in general) will not take care of “us”(white and/or native-born Americans) in our old age. But at the same time, we can’t take it for granted that all we need to do is boost the number of bodies living in the United States to solve our retirement crisis.
December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.
Forbes Post, “The Social Security Trust Fund Is Real – But So What?”
Originally published at Forbes.com on May 5, 2018.
Stop me if you’ve heard this one before: “Social Security would be doing just fine if the thieving politicians hadn’t stolen all the money from the Trust Fund that we paid in to earn our benefit checks.”
Or maybe this: “The Trust Fund is just an accounting gimmick, nothing more, and Social Security is broke.”
Who’s right?
The Trust Fund is real.
Well, sort of.
The Social Security Administration does indeed invest its surpluses, that is, the revenues from FICA taxes, taxes on Social Security benefits, and interest credited to the fund, less benefits paid out, into government bonds. And if you or I, or, say, a pension fund, happened to exist in government bonds, we wouldn’t consider that investment to be “fake,” or the money to have been “stolen” from us. It’s real money, and we’d have a real right to that money. In the same fashion, the Trust Fund will redeem its bonds when it begins to run deficits.
But that’s not the end of the story.
Consider that the trust fund is not a matter of “us” saving for “our retirement.” There was, to be sure, a real element of building up surpluses during the early years of the program, though not to the degree that would truly make it an advance-funded program, rather than only partially-so. In any event, the Trust Fund was virtually depleted in 1983, and the system would have been unable to pay full benefits but for FICA contribution increases beginning in 1977 and accelerated in a 1983 bipartisan reform bill, which also raised the retirement age to 67 and otherwise stabilized the system’s finances. The funds which have built up since then are the moderate excess of revenues over payouts following the tax hike, not a true pre-funding as you’d see, for example, in a private-sector pension plan. Its function is really just, in principle, to smooth out spending over time.
The trouble is, though, that one can outline what the Trust Fund “is” in terms of accounting and financing, but people tend to look at this in a moral sense. The Trust Fund is the embodiment of American workers’ conviction that, having paid taxes during their working lifetime, they have a moral right to their Social Security benefits, or, more generally, to a retirement free of financial worry. And this is not the case.
Consider this alternative: what if, in the 1983 Social Security reform, rather than building up surpluses, Congress had decided that any surpluses would be become general tax revenues and any deficits would be paid directly through tax revenue? Functionally, there would have been little difference, other than bookkeeping, between building up a fund, nominally, that is immediately funneled into government spending, and doing so directly, and between bonds being redeemed, in the future, requiring new borrowing to fund the redemptions (or running a budgetary surplus — in some alternate universe, anyway), or just borrowing directly.
Alternately, what if Congress had simply decided that FICA taxes would vary each year, determined by the projected Social Security payouts each year? We would not be discussing the depletion of a fund, but instead, perhaps, would be complaining at the prospect of our FICA taxes growing ever higher.
What would the economy of the United States have looked like in the past several decades had there not been FICA surpluses used to buy (or “buy” with scare-quotes if you like) government bonds? Consider that the Social Security Trust Fund (in combination with the Disability Trust Fund), at the end of 2016, “owned” 13% of the total National Debt (the link includes a detailed breakdown of what entities own what portion of U.S. debt). Did the availability of the Trust Fund as a debt-purchaser, help hold down interest rates, keep government borrowing affordable, and keep the deficit lower than it otherwise would have been? Or did this simply enable Congress to defer dealing with deficits when they might otherwise have been motivated to make hard decisions?
Or consider our Neighbors to the North. Canada, after all, has a Trust Fund, but the nature of the fund is radically different: it is a real investment fund, holding a wide variety of assets, including private equity and real estate holdings (they fully or partially own Petco, Univision, and Neiman Marcus, for instance). Their long-term planned asset mix is 55% equities, 20% fixed income securities (largely government bonds) and 25% real estate. (Readers can learn more at the Canada Pension Plan Investment Board website.) In addition to providing a higher rate of return over time than the interest credits of the U.S. Social Security Trust Fund, the very nature of the Canadian fund is wholly independent of the government. What’s more, although the Canada Pension Plan has historically been more-or-less pay-as-you-go just as in the U.S., they have actually just recently implemented a benefit increase, which is being phased in slowly enough to be wholly pre-funded by a payroll tax increase.
The surplus that generated the Trust Fund were a missed opportunity.
To be fair, there have been worries about the prospect of the government of the United States managing a sovereign wealth-type fund of such a massive size. Could an investment board truly make decisions impartially? Would the government be too heavy-handed, attempt to micromanage the companies in which it invested — for example, by monitoring executives’ salaries for “fairness” or requiring a sufficient number of female or ethnic-minority board members? Maybe. But there would have been an alternative — the time would have definitely been ripe for an alternate Social Security system, in which the pre-funded component from those surpluses could have been in the form of individual accounts or pooled but nongovernmental funds (hmmm . . . where have I heard that before?). Such a system would have allowed for the buildup of real advance funding for retirement, rather than leaving us worried about the future.
But the “Real-ness” of Trust Fund is a bit academic.
The bottom line is that whether the Trust Fund is “real” or just a fiction on paper, in the end, doesn’t matter. Whether the Trust Fund uses its assets to pay retirees, and the federal government has to borrow, to pay back that debt, or whether the government has to pay those benefits directly, it’s still the case that money has to be found — and the amount of money which will have to be found, for retirement benefits, Medicare, and other expenses, is forecast to grow dramatically. A January paper from the Brookings Institute provides some very sobering numbers: due to the aging of the American population, federal spending on the elderly is forecast to grow from the current (2017) level of 20.5% of GDP, up to 29.4% in 2046 — and that’s not 29.4% of government spending, but 29.4% of our total economic output. And this isn’t just a temporary “hump” due to the Baby Boom. The author states:
Although we often talk about aging as arising from the retirement of the baby boomers, that is somewhat misleading. The retirement of the baby boomers represents the beginning of a permanent transition to an older population, reflecting the fall in the fertility rate that occurred after the baby boom and continued increases in life expectancy. Because aging is not a temporary phenomenon, we can’t simply smooth through it by borrowing. Instead, it is clear that population aging will eventually require significant adjustments in fiscal policy—either cuts in spending, increases in taxes, or, most likely, some combination of the two.
What should the policy response be to future impact of an aging population? The paper acknowledges that such forecasting is uncertain, and offers various options but does not promise any easy solution — because there is no easy solution on offer.
December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.