Support for Baby-Boom Retirees - Not to Worry
Vatter, Harold G., Walker, John F., Journal of Economic Issues
Discussion of the baby-boom retiree problem has suffered from two serious inadequacies that have made the Social Security problem appear much more ominous than it is. The first inadequacy is an overweening emphasis upon fiscal and related pecuniary aspects to the neglect of output of goods and services. The second is the almost total neglect of projected real income and productivity rises. In fact, the baby-boom retirees can be coped with on the basis of hypothetically reasonable projected magnitudes.
In all the current dire warnings that the future economy cannot provide Social Security support for the upcoming baby-boom retirees, no attention is paid to the main determinant of capacity to support. That determinant is the historically established rise in productivity as expressed in per capita output or output per hour of the employed population.
The analysis here is confined to Social Security (OASDI), excluding Medicare. While this is unfortunate, there are two good reasons for the exclusion. The first is that Social Security is firmly entrenched for the foreseeable future, but Medicare is insecure as a federal institution. The second, related reason is that the current unremitting attack on Medicare makes long-term projections of its future impossible.
It is a commonplace observation in the United States today that there will be no Social Security funds available to support the elderly by sometime in the first third of the next century. Strangely, maintaining Social Security pension support through 2030 involves very little or no strain on society, whereas abolishing Social Security would cause substantial strain.
Social Security is many separate programs for many dependent groups. The number of Social Security beneficiaries substantially exceeds the population aged 65 and over. There are old-age pensions for covered workers, that is, people who have paid Social Security taxes for a specified number of years (usually at least 10 years). They are eligible for a pension after reaching a certain age (usually age 62 or older). There is also support for orphans (to age 18) of decedent Social Security-covered workers. There is support for the widows and widowers of covered workers, for covered workers who become disabled, and for wives/husbands of reared covered workers who are not covered themselves or would get less support than they would from a spouse's pension. Most, but not all, of the retired and their spouses who have no separate coverage and many of the widows and widowers are over the age of 65.
Fortunately, most of these groups have grown more slowly than the retirees and can be expected to continue to do so in the future. The disabled and widows and widowers groups grew faster than the retired from 1960 to 1980 but slower than the retired from 1980 to 1993. All other groups have consistently grown more slowly than the retired. Consequently, part of the retirement hump will be reduced by the orphan, disability, and dependent survivor dearth. Table 1 illustrates the pattern.
The Census Bureau issues many estimates of the future size of the population. The popular "middle series" estimates are used in the projection of the retirement problem. The Census reports that people 65 and older made up 12.7 percent of the population in 1992 and will constitute 20 percent of the population in 2030. The rise is substantial indeed.
Table 1. Numbers and Rates of Growth of Retired Workers and Other Social Security Recipients, 1950-1993 (in Millions) Average Annual Growth Percent 1960 1980 1993 1960-93 Retired workers 8.1 19.6 26.1 3.6 Other recipients 6.8 16.0 16.1 2.7 Children 2.0 4.6 3.5 1.7 Disabled workers 0.5 2.9 3.7 13.9 Wives and husbands 2.3 3.5 3.4 1.1 Widows and widowers 14.8 35.6 42.2 3.2 Total beneficiaries 14.8 35.6 42.2 3.2 Other/total in percent 45.7 45.0 38.2 Source: U.S. Bureau of the Census, Statistical Abstract of the United States [1973, 293; 1995, 380].
To project total beneficiaries in 2030, it is assumed that the ratio of beneficiaries to people 65 and over remains constant at 1.29 (see Table 2). This overestimates the number of beneficiaries in 2030 because the number of non-retirees grows more slowly than the number of retired (see above).
The Census projects a population 65 and over of 70,175,000 in 2030. Consequently the number of Social Security beneficiaries in the estimate is 90,526,000 [TABULAR DATA FOR TABLE 2 OMITTED] (1.29 times 70,175,000). Since the projected total population for 2030 is 350 million, beneficiaries will be 26 percent of all residents. In 1992, they were "only" about 16 percent. On the surface, this looks very ominous, but the deceptively fearful burden must reckon with the probable long-term growth in the economy.
In estimating the capacity of the future employed persons in the economy to transfer goods and services to all of the Social Security beneficiaries, emphasis here will be upon the hypothetical output of consumer goods and services so transferred.
The total output of the economy is measured by the gross domestic product (GDP). The amount of the GDP used by consumers is called personal consumption expenditures (PCE). Adjusted for inflation, they are called real GDP and real PCE. Real figures, on a 1987 base, are used throughout. PCE is a quite stable proportion of GDP in the long run. Since 1970, it has never been less than 62 percent nor more than 67 percent of GDP.
There is a virtual subindustry within economics estimating the potential growth rate of the GDP. Since PCE is such a stable share of GDP, estimates of GDP growth are also estimates of PCE growth. In recent years, the most popular estimates of GDP growth have hovered around 2.5 percent per year. In the current balanced budget battle in the government, the "experts" at the Congressional Budget Office estimate 2.3 percent. These are forecasts of a future significantly worse than America has ever experienced.
Recently, the Boskin Commission reported that the CPI has been overstating inflation by about 1.1 percentage points for many years. If correct, this is wonderful news. In calculating real growth, we take measured PCE in two consecutive years. If the growth is 5 percent and the inflation measured by the CPI is 3 percent, then we say real PCE grew 2 percent. Obviously, taking one percentage point off inflation creates one percentage point of additional real growth: the burden is therefore smaller [Baker 1996].
In the right-hand column of Table 2, we present the results of this additional growth, assuming that all of it is allocated to the residual consumption of non-beneficiaries. It produces a world in which the real consumption per person for the nonbeneficiaries grows significantly more than the growth in income per beneficiary. It is mean-spirited beyond the limits of normal discourse to call it a burden for nonbeneficiaries to increase their consumption faster than the beneficiaries do. If we really do have real growth in excess of 3 percent per year, we need to seriously discuss expanding benefit programs for the elderly beyond those described here.
Still, virtually all economists assume GDP and thus PCE growth rates above the rate of growth of population. This gives us a very simple solution to the problem. In any case in which PCE per capita rises, there exist several arrangements that allow the PCE of every group in the system to rise. Nobody has to "sacrifice." Every group can consume more per person throughout the baby-boom retirement years.
Assuming a slow growth rate of 2.0 percent per year and assuming the average Social Security beneficiary receives the same share of PCE in 2030 that such a beneficiary received in 1992, then PCE in 2030 will be $7,122 billion and the share to each beneficiary will be $14,406. All other PCE remains in the hands of the nonbeneficiary population. In 1992, PCE per non-beneficiary was $14,392; by 2030, PCE will have grown to $22,422 per non-beneficiary.
To be sure, there is an enormous shift in the share of consumer products from non-beneficiaries to retirees. The ratio of total benefit payments to residual PCE rises by 140 percent. And benefits per beneficiary surge by more than 100 percent, whereas residual PCE per capita for non-beneficiaries rises by only 50 percent. Nevertheless, the basic projection holds: non-beneficiaries as a group are able to contribute a lot to the elderly for pensions, as their moral obligation should dictate, yet they will still be materially much better off.
What has happened, according to this analysis, to the "burden" of supporting Social Security beneficiaries? In 1992, the consumption of an average beneficiary was only 47 percent of the consumption of a non-beneficiary. The projections for 2030 show that this "burdensome" percentage rises to 64 percent.
Since 1984, total Social Security taxes paid by the non-beneficiaries have continuously exceeded the total benefits paid to beneficiaries. This is a remarkable public consensus; not even during the patriotic fervor of wartime has the population been willing to be taxed sufficiently to match what is transferred to the military effort. Why, then, will the taxed population be unwilling to be taxed out of their much higher incomes sufficiently to match the output they will be transferring to the babyboom generation during the hump retirement years?
In the schema just presented, the ratio of benefits to PCE rises from 8.5 percent in 1992 to 18.3 percent in 2030. Benefits per beneficiary grow more rapidly than the consumption per non-beneficiary. Is it a burden on society to operate a system where the oldest generation consistently receives percentage increases in real consumption that grow faster than those for society generally? If so, then the very development of Social Security is a burden, for it was in part developed to produce such a pattern. But every modern industrial society has willingly adopted this program, accepting the argument that it is a benefit, not a burden.
To be meaningful, the "burden" argument must show that a rearrangement that preserves the previous distribution of consumption between the beneficiaries and non-beneficiaries makes the whole system work better. Considering the 8.5 percent of consumption that obtained in 1992, the resources that would be available to the beneficiaries in 2030 would be only $6,687 per person, while the non-beneficiaries would enjoy $28,930 per person. With such small public transfers to beneficiaries, quite massive private transfers from children to parents would necessarily appear as children obey the Fourth Commandment. Would the private transfers efficiently cover the needy elderly? No. The elderly without children would often be condemned to poverty, which an income not quite 25 percent of the non-beneficiary average implies.
The worst of the burdens would fall on the most typical family patterns: one or two children trying to aid two parents. Or most horrifying, two "only children" married to each other and trying to aid four surviving parents and a couple of children in college. In these cases, the lucky family is the one in which the older generation dies before it retires. Then the "sandwich generation," the one between the students and the grandparents, has no payments to make to the old. The unlucky have living retired parents.
The burdens on the sandwich generation are taxes to support their parents' generation. The benefits are insurance against the nightmare of a single worker facing four parents recently retired on very low incomes, a sick spouse, and several children needing expensive educations. Furthermore, in a more practical but normative sense, the offspring of retirees are in debt to retirees and hence owe them some real income transfer payments, as pointed out in a normative essay by Thomas Pogue and L. G. Sgontz . This is because in their working years the retiree generation typically helped finance the education (human capital) acquired by the offspring generation.
Reducing Social Security support for the old decreases these unmeasured insurance benefits and the publicly financed consumption of the elderly as it increases the potential private consumption of the non-beneficiaries. Transferring consumer products from the elderly to non-beneficiaries does not increase total consumption, but reducing the insurance does reduce the unmeasured insurance benefits.
Furthermore, cutting back aid to the elderly benefits the wrong groups. Sandwich generation members with dead parents are significantly better off while those with living parents are worse off. Logically, this encourages abandonment of dependent parents by working children and tends to break up families.
A widespread consensus is developing in favor of substantially increasing the age at which full pension benefit payments are first paid to Social Security beneficiaries. However, reasonable projections to 2030 indicate that such a policy will not accomplish its purpose.
If the additional non-beneficiaries did not work and therefore add to the total volume of consumer products, the result would be a greater proportionate increase in the number of non-beneficiaries than in the volume of consumer products retained by non-beneficiaries. That follows from the fact that on a per capita basis beneficiaries would be getting less than non-beneficiaries. The change would therefore lower the average per capita volume of consumer products previously commanded by the formerly smaller non-beneficiary group. Of course, if some of the added non-beneficiaries worked and produced more consumer products, that lowering of the average would be mitigated.
Even if it were presumed that one-third of the 12-15 million rejects between the ages of 65 and 67 were to become employed at full-time, taxable jobs, the resulting residual consumption per non-beneficiary would barely return the average to the $22,422 level projected in Table 2! Even now, the recipients who do work pay Social Security taxes.
It would therefore appear that neither beneficiaries nor non-beneficiaries as a group would be any better off if the full benefit pension age were 68 rather than 65 in 2030 when the retirement of the baby boomers peaks out. But it is worth repeating that both groups would be on average much better off than in 1992, and the "burden" of more retirees should be readily bearable.
The thrust of this analysis is recognition of the vital importance of reasonable estimates of a labor productivity rise for appraising the ability of taxed workers to transfer consumer products to the retired baby boomers of 2030. The widespread analytical neglect of productivity in favor of financial flows has obliterated the capacity of the non-beneficiary population to provide the necessary material support for Social security retirees. The essence of support capability is production, and there is every reason to estimate that production will be adequate to substantially increase the per capita consumption of both beneficiaries and non-beneficiaries in the peak retirement period. Financial arrangements can readily be constructed to implement the real product flows.
All current projections of long-term income growth exceed current projections for long-term population growth. In a period where income per capita increases for the whole population, it is illogical to say some part of the total population must suffer a decrease. We certainly have the capacity to lower or decrease the rate of growth of income of the dependent population, but scarcity is not imposing such decisions upon us, although other values may.
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Harold G. Vatter and John F. Walker are Professor Emeritus of Economics and Professor of Economics, Portland State University, respectively.…
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Publication information: Article title: Support for Baby-Boom Retirees - Not to Worry. Contributors: Vatter, Harold G. - Author, Walker, John F. - Author. Journal title: Journal of Economic Issues. Volume: 32. Issue: 1 Publication date: March 1998. Page number: 79+. © 1999 Association for Evolutionary Economics. COPYRIGHT 1998 Gale Group.