Here’s a post that conjoins two of the topics of recent posts: pensions and Medicare. Here in the United States and Europe we’re working as hard as we can to rack up bills and pass them along to the coming generations. Satyajit Das declaims at Bloomberg View:
This growing burden on future generations can be measured. Rising dependency ratios — or the number of retirees per employed worker — provide one useful metric. In 1970, in the U.S., there were 5.3 workers for every retired person. By 2010 this had fallen to 4.5, and it’s expected to decline to 2.6 by 2050. In Germany, the number of workers per retiree will decrease to 1.6 in 2050, down from 4.1 in 1970. In Japan, the oldest society to have ever existed, the ratio will decrease to 1.2 in 2050, from 8.5 in 1970. Even as spending commitments grow, in other words, there will be fewer and fewer productive adults around to fund them.
Budgetary analysis presents a similarly dire outlook. In a 2010 research paper, entitled “Ask Not Whether Governments Will Default, But How,†Arnaud Mares of Morgan Stanley analyzed national solvency, or the difference between actual and potential government revenue, on one hand, and existing debt levels and future commitments on the other. The study found that by this measure the net worth of the U.S. was negative 800 percent of its GDP; that is, its future tax revenue was less than committed obligations by an amount equivalent to eight times the value of all goods and services America produces in a year. The net worth of European countries ranged from about negative 250 percent (Italy) to negative 1,800 percent (Greece). For Germany, France and the U.K., the approximate figures were negative 500 percent, negative 600 percent and negative 1,000 percent of GDP. In effect, these states have mortgaged themselves beyond their capacity to easily repay.
In the United States statistically workers receive slightly less in benefits from the Social Security system than they pay in as payroll taxes. The situation is reversed for Medicare. We receive much more in benefits from the program than we ever paid in. Or, more precisely, our health care providers receive more in benefits than we paid in. Our own benefits vary widely.
One of the proposals for rectifying the problem, importing a labor force, is just another form of kicking the can down the road. Unless those foreign workers are here illegally and not paying into the Social Security or Medicare programs, eventually they’ll be eligible for benefits, too, saddling future generations with an ever-larger tab. There’s a better argument for legal workers who earn right around FICA max but that’s still problematic.
Sshhh! If we’re very careful, maybe the younger generation won’t notice.
I’d like to see the calculations that say that I’m receiving “slightly less” in SS benefits than what I paid in. My own calculations show that if I’d had the option to skip SS and put my lifelong SS contributions into the S&P index fund, I’d have reaped some $2,000,000 to $7,000,000 in investment funds upon turning 66. Those who are benefiting from my SS contributions includes many on disability, children, spouses (up to 5, even if divorced) and widowed of each living or dead contributing worker. And the life-long SS contributor who dies before reaching 66 will leave no millions to his heirs. Huge rip-off!
Read the long form of the annual report of the Social Security Trust Fund trustees. It contains that information.
Long term thinking is required. However, that is rarely in evidence by the elected leadership.
BTW, with increased automation, the gig economy, etc will there be enough jobs paying FICA max wages/salary to go around in 2050?
Make FICA a productivity, not an income tax. Then we can tax all the robots when they take over and we’ll all live fat, dumb and happy just like in Wall-E.
walt,
Automating jobs would be the best thing for ensuring we can meet our retirement liabilities because it would mean a big jump in productivity.
Does productivity pay FICA taxes or do employees/employers pay the tax?
It isn’t the money that’s really important. Imagine an extreme version of the worker to retiree ratio: 1 worker and 300,000,000 retirees.
That one worker is going to have to produce all the food, all the cars, all the housing and everything else the retirees will need. We can see the problem is not one of getting together enough money to pay her, it’s a question of how much stuff she can produce. If she can’t make enough then all the money in the world won’t be of any help.
Our focus on the financial aspect is distracting us from the reality that our productivity growth has been slowing for several decades. That’s where the attention needs to be.
+1 to Ben’s comment.
Right now the US consumes more then it produces and does this by borrowing from other countries who have surpluses. Looking at the demographic tables, in 15-30 years, all developed and most developing countries (including China) will likely want to consume more then they produce given their aging. Who’s going to make all the stuff that the non working want?
In my view the productivity issue is one of a shortfall in domestic business investment.