One of the items frequently cited, then forgotten, in the debate over Social Security reform is the ratio of the number of individuals receiving the program's retirement benefits to the number of workers who are taxed to provide them. Currently, as noted by economist Arnold Kling, this ratio is 4.5 workers for each retiree, with the ratio declining to just 2.5 workers for every retiree in 2030, and stabilizing around this level thereafter.

More than anything else, this increased burden upon younger workers to support the retirement benefits of earlier generations is driven by the demographics of the baby-boom generation. Aside from their large numbers in proportion to earlier and later generations, the baby-boom generation can also expect to live longer, which will also contribute to the increased burden upon workers of later generations. This demographic effect is a primary driver in reducing the amount of retirement benefits that Social Security will be able to deliver in the future.

But, what if we were to fix the ratio of workers to retirees at a constant level, and then change the age when workers may retire and receive full benefits to keep pace with the worker/retiree ratio? Robert D. Arnott and Anne Casscells looked at this question in their article from the March/April 2003 issue of the Financial Analysts Journal "Demographics and Capital Market Returns" (available online as a 684 PDF document). The following chart from the article illustrates how the retirement age would have been affected had this system been in place beginning in 1950, and projects ahead to 2050:

What's interesting to note from the article is that the authors' forecast increase in the age of retirement to 73 around the year 2030 is not driven so much by the available savings and benefits available to support the retirees, as it is their demand for goods and services. Below a certain worker/retiree ratio, those who might have otherwise retired at today's scheduled retirement age of 65 (which is already in the process of being raised to 67), Arnott and Casscells predict these individuals will be forced to work longer in order to have the goods and services they consume available in sufficient supply to support their demand!

Overall, the demographics of the baby-boom generation make for a neat topic of discussion for how Social Security will need to be reformed to be sustainable for the long term. With the current system, those expecting to receive benefits after 2041 will have their benefits slashed by 26% according to the Social Security Administration's projections. The sooner the sustainability of Social Security for the long haul is addressed definitively by today's leaders, the better off the nation will be.

Labels: demographics, social security

- posted by Ironman at 5:30 AM | Permalink | |