LDL&S: Social Security

LDL&S: Social Security February 26, 2008

Say you were standing with one foot in the oven and one foot in an ice bucket. According to the percentage people, you should be perfectly comfortable. – Bobby Bragan

A propos of yesterday’s post on the future of Social Security, I thought I’d say a word about two different statistics often cited in Social Security debates as evidence of the unworkability of the current system that don’t quite prove what people think.

First, people often claim that while Social Security may have made sense when originally passed, it is no longer a viable system because of increases in life expectancy. So, for example, back during the Great Social Security battle of 2005, the Bush administration’s talking points stated that “Social Security was designed in 1935 for a world that is very different from today… In 1935, the average American did not live long enough to collect retirement benefits. Today, life expectancy is 77 years.”

The statistic may sound compelling, but only if, unlike Bobby Bragan, we don’t attend to the meaning of the word “average”:

If we look at life expectancy statistics from the 1930s we might come to the conclusion that the Social Security program was designed in such a way that people would work for many years paying in taxes, but would not live long enough to collect benefits. Life expectancy at birth in 1930 was indeed only 58 for men and 62 for women, and the retirement age was 65. But life expectancy at birth in the early decades of the 20th century was low due mainly to high infant mortality, and someone who died as a child would never have worked and paid into Social Security. A more appropriate measure is probably life expectancy after attainment of adulthood.

[T]he majority of Americans who made it to adulthood could expect to live to 65, and those who did live to 65 could look forward to collecting benefits for many years into the future. So we can observe that for men, for example, almost 54% of the them could expect to live to age 65 if they survived to age 21, and men who attained age 65 could expect to collect Social Security benefits for almost 13 years (and the numbers are even higher for women).

Also, it should be noted that there were already 7.8 million Americans age 65 or older in 1935… so there was a large and growing population of people who could receive Social Security. Indeed, the actuarial estimates used by the Committee on Economic Security (CES) in designing the Social Security program projected that there would be 8.3 million Americans age 65 or older by 1940 (when monthly benefits started). So Social Security was not designed in such a way that few people would collect the benefits.

The second misleading statistic used the debates on Social Security has to do with the declining ratio between workers and retirees. Again, from the Bush administration talking points: “In 1950, there were 16 workers to support every one beneficiary of Social Security. Today, there are only 3.3 workers supporting every Social Security beneficiary. And, by the time our youngest workers turn 65, there will be only 2 workers supporting each beneficiary.”

Based on these numbers the situation looks pretty dire. But as Bryan Caplan has pointed out, when thinking about the sustainability of Social Security, the right ratio is not that of workers to retirees, but workers to people. While it is true that the fraction of the population over 65 has been rising over the last few decades, the fraction of the population that is employed has been rising, due to the fact that families have fewer children now than previously and to the fact that a higher percentage of women work outside the home. Thus, while the number of workers for each retiree has fallen considerably since Social Security was enacted, the number of workers for each dependent is at an all time high. It will start to fall soon, according to current projections, but even by 2080 it won’t be back to the level it was in 1960 (when, needless to say, average worker productivity was a lot less than it is now). Supporting a retiree is somewhat more costly than supporting other sorts of dependents, but taking this into account doesn’t alter the long term projections all that much.

Again, none of this is to say that there aren’t problems with the Social Security system as currently structured and funded. They just aren’t nearly as bad as these statistics might suggest.

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