Wednesday, August 21, 2013

Another Fact Supporting the Stability of Social Security

Recently, Bill McBride of posted a graph that brought a new perspective to the Social Security debate.  For may years now we have heard that Social Security is unsustainable because the ratio of the number of retires to the working population is growing.  Therefore eventually there will be too many retirees for the working age population to support.  Or, even if they could support them, it wouldn't be fair to take so much from working people and give it to retirees.  The assumption in this argument is that the percent of the population that is working will decrease over time so that fewer workers will support a greater share of the non-working population.  The argument then implies that a remedy for this supposed problem is needed.  And that this remedy can only be a combination of raising the retirement age and reducing benefits for retirees.  There is no other choice we are told, because its a mathematical certainty.

The graph that Bill McBride created may lead to a rethinking of that certainty.  In the graph, reproduced here, we can see that the population of 25 to 54 year olds and 25 to 59 year olds as a fraction of the overall population has remained fairly stable over the last 100 years, and is projected to remain at about the same levels for the next 50 years.

The importance of these two age ranges is that these are the primary working years for most people.  That is, most people in these age ranges are employed and are earning a significant portion of their life long income.  So, the workers in these age brackets earn most of the income that supports those in the population that do not work.  Well, if the population is aging how can this level stay so steady?  The answer is that the other end of the population spectrum is shrinking.  There are fewer children born today per family than 100 years ago, and those that are born are more likely to live to adulthood and old age.  All those efforts to improve health, nutrition, sanitation, and health care have worked!  We now have much lower infant and child mortality, and much longer life spans than 100 years ago.  So, there are as many working people as a fraction of the population as has ever been and this fraction will likely continue to stay stable into the future.  The change over these years is that the working population supports fewer children and more elderly people.  

However, one key difference is households composition.  Children usually live with their parents in one household.  They therefore reap the benefits of the efficiency of many people living together, such as shared common areas, shared meals, shared utilities, etc.  While the  retirees likely have their own home and would like to continue to live in that home as a separate household.  Maintaining a separate household is more expensive than sharing one, so the costs of a growing aged population would be larger than that of a growing child population.  But we can see that there is no shortage of workers to support those that don't work.  Perhaps the solution is to have retirees move into their children's homes to live in extended households.  Many are likely doing that already.  In past generations having elderly parents in the home was more the norm.  Perhaps it will be again.

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