Be very careful when you are looking at numbers about Social Security.
Numbers about Social Security do not lie, but they can mislead not only the public but policy makers as well. The numbers watched by the experts in Washington suggest that Social Security is slowly moving to crisis. The numbers have lulled even the harshest critics of the system into believing that the system is many years from crisis. The problem is in the numbers : we are looking at the wrong numbers.
This article isn’t for policy wonks. It is intended for average Americans who get pounded with useless statistics about the system. This is a typical quote that a reader will see when researching Social Security : “When Social Security started, there were 16 or 17 workers for every retiree. When the baby boom finally finishes retiring, there will be 2 workers for every retiree.”
It sounds scary, but it is completely uninformative. The statistic in this case is the Support Ratio[1]. It doesn’t accurately track what it is suppose to track, and authors subsequently quote bad data out of context. In the process, the statistic goes from simply bad economic theory to dangerous public policy.
First, the number of workers includes government workers who have been purchased with debt, or future tax revenues. This debt inflates the number of workers today by pulling future jobs into the today's numbers. If as CBO has warned, the government is unable to place debt at reasonable prices, these jobs will disappear. Worse, if the productivity of the public-sector jobs doesn't create sufficient wealth to pay off this debt, the debt becomes a drag on future jobs.
Second, the number does not factor in the impact of the Trust Fund[2]. The Trust was designed to hold excess cash in the system, so that the Trust Fund could serve as an addition worker as the Baby Boomers started to retire. Hence some of the workers from the 1990s were really working to support 2010 beneficiaries – the first year that outgo of the system exceeded payroll tax contributions. In 2009, the Trust Fund generated about 110 billion dollars of interest income. That is about 16% of the total income of the system. So the workers per retiree should have been roughly .5 workers higher.
Even if one had an accurate Support Ratio, the number isn't very informative because it does not factor in productivity. As productivity increases, it takes fewer workers to support a retiree. When Social Security started, we had something like 25% of our workforce in argricultural production. Today it is something like 3%. Telling someone that there are too few workers without knowing what their productivity is, is just like telling someone that they are over-eating without considering their exercise regime. That is where the data goes from wrong to pointless.
Experts use this statistic far out of context, as you can see in the example above. In the context above, the author assumes that workers are the same today as in 1955. The assumption is horribly wrong. Today’s worker contributes at a higher rate and against a larger cap. In 1955, the maximum contribution was an inflation adjusted $168. Today it is more than $13,000. In other words there are workers in 2011 who effectively are the same as 77 workers from 1955.
Like the workers who are counted like beans, the beneficiaries are not the same today as they were in 1955. According to JustFacts.Com, “Benefits have not remained constant. If they had, SS would now be collecting roughly three times more in taxes than it is paying in benefits.” I haven’t seen their data, but it is not unreasonable. Beneficiaries are living longer and may well be retiring earlier. Comparing the number of beneficiaries over time when pay-outs are changing is simply pointless.
A reader might arrive at this point in the article feeling relieved that the Support Ratio suggests that the problem is smaller than the raw data suggests. And that belief would be correct if workers did nothing but support retirees. The fact is that they do substantially more than support retirees. Workers through wage taxes also support the budget deficit. The budget deficit is growing and so is the interest cost to support it. Today’s worker carries about $75,000 in look through debt from the government. Assuming that workers today are in the same position to provide financial support for retirees as they were 40 years ago, or even 5 years ago, is where authors cross the line from bad economics into dangerous public policy.
In summary, there very well may be a shortage of workers to provide benefits for all of the Baby Boomers. My guess is that there is a dramatic shortage but I don't have any data to support that belief. The actual data that you need to see is compensation slack - which would measure the ability of workers to support a retiree. If you had that data, I suspect that the slack has dropped radically and you would see that the crisis is now, not some stardate in the distant future.
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[1] The SUPPORT RATIO, which measures the number of beneficiaries to number of retirees. Data Source Social Security Administration
http://www.ssa.gov/OACT/TR/2010/lr4b2.html
[2] There are some who question the existence of the Trust Fund. Here is why I discount their view. The government holds a number of hard assets such as oil, land, and gold. Beyond that, the government has future revenue streams based on 16.6 trillion dollars in retirement assets which are tax deferred. Beyond that, the government has the ultimate power of taxation, printing money. As long as the citizens grant the power to print money to the government, US Treasury debt will represent the safest investment in the country.
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