Government Spending

March 29, 2012 By Guest Blogger

Setting Up the Problem

First of a series

By Charles C. Johnson

According to a recent study by the Government Accountability Office, Social Security will running out of money in the year 2036, the year most members of generation X will begin to draw on it after a lifetime of paying in. According to the study, this is because of a very simple fact that as "people are living longer and labor force growth has slowed." The dubious year of 2010 represented the first time since 1983 that the Social Security trust began paying out more in benefits than it collected in tax revenue. And, in the middle of a three-year recession where unemployment is perpetually above 8 percent, it doesn't look like it will be getting better anytime soon.

The problem:  Social security’s demographics are in trouble and people are relying on wishful thinking to fund their retirement.

Congress created Social Security in 1935. The age of benefit eligibility (65 years) was set to be higher than the life expectancy of the typical American male. (61 years at the time). In 1940, men who reached 65—the first year of Social Security eligibility requirements—could expect to live to age 67. In 2010, when a man turns 65 he will live to age 82. Meanwhile birth rates have been drastically reduced. Total fertility for the average American woman was 3.5 children; in 2010, total fertility is just at replacement levels (2.1 children).

Part of the problem is the welfare state itself. Those countries with the costliest state-run pensions have seen the most precipitous declines in birth rates. Economists Michele Boldrin, Mariacristina De Nardi, and Larry Jones show that as a state-run pension grows to 10% of a country’s GDP, there is a reduction of between .7 and 1.6 in the fertility rate. In earlier times, people “invested” in children to defray the costs of retirement. (This is perhaps why China, with its one-child policy, has one of the world’s highest savings rates.) Forced to bear the cost of caring for a number of baby boomers through social-insurance arrangements, families find that their after-tax resources are not enough to bear the costs of having children. The welfare state, in other words, eats its seed corn. You run out of other people’s children. And every effort by foreign governments to encourage their citizens to have more children has failed.

It gets worse.

In 2010, Americans are living longer than ever before. The typical beneficiary now collects Social Security for eighteen years—and this number is increasing. The 2010 U.S. census found that people who are 90 or older have nearly tripled since 1980, to 1.9 million. They are projected to grow to 8.7 million by 2050.  Fully half of those oldest old receive their median income from Social Security.

In 1960, there were five workers for each beneficiary. In 2010, the ratio was 3-to-1. As the Baby Boomers exit the work force, it plunges rapidly to 2-to-1 within a generation. This imbalance threatens force higher taxes upon younger generations to finance the costs. In 2008, it cost roughly 12 cents out of every taxable dollar workers earned to pay out social security benefits; in 2033, it will rise to more than 17 cents of every taxable dollar. Fully one-third of workers’ incomes in 2033 will go just to support Medicare and Social Security, to say nothing of the taxes associated with paying the rest of their local, state, and federal government costs.

To help pay for this demographic problem, social Security taxes and benefits have risen dramatically. (Today’s tax rate is roughly twice what it was in 1960.) As social security is a “pay as you go system” – more on that later – this means that those who paid in lower amounts will get higher benefits, while those who have paid in more will get less later on. (This is even before Social Security goes insolvent in 2037.)

Eugene Steuerle and Stephanie Rennane of the Urban Institute estimate that a two-earner couple both earning an average wage who retire in 2010 will get $906,000 in benefits having paid only $588,000 in payroll taxes. The same couple retiring in 2030 will get $1.23 million (in constant dollars) while having paid $796,000.

Unfortunately, many couples are coming to rely upon the government social insurance programs thanks to the Great Recession.

On November 16, 2011, Wells Fargo released the results of its survey of 1,500 individuals between ages 25 and 75, titling it “80 is the New 65 for Many Middle Class Americans.” Another study released in June showed three-quarters of those surveyed plan to work beyond age 65.

In the Wells Fargo study, one quarter of middle class Americans say they will need to work to at least 80 to pay their bills. The average respondent has only saved $25,000 towards his retirement goal of $350,000, and that three out of ten of those already in their 60s have less than $25,000 in the bank.  When asked whether they had a written financial plan, fewer than one in three said yes, with most of those without such a plan thinking it’s pointless,” that they are already “overwhelmed” financially, or that they are “too far behind to catch up.”

• Social Security

• children

• Workers

• Age

• Benefits

• Retirement

• Average

• Paid

• Americans

• Work

• Taxes

• Beneficiary

• Problem

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