The Implications of Social Security's Long-Range Financial Projections
Urban Institute Retirement Project Brief No. 6
8 Pages Posted: 7 Feb 2001
Date Written: July 1999
Abstract
A major shift is projected in the demographic structure of the population, leading, among other things, to serious financing problems for the nation's public pension and health financing systems. This brief explores the demographic and economic assumptions that underlie the current Social Security financing projections and notes some of their implications for Social Security reform. The financing problem comes virtually entirely from a projected increase in the ratio of beneficiaries to workers. Although the retirement of the baby boom generation contributes, at least temporarily, this demographic trend is projected to continue long after the last of the baby boom generation has moved through the system. The projection is the result of assumptions about future trends in birth rates, death rates, and disability incidence. In fact, some 60 percent of the entire projected 75-year Social Security deficit can be traced to the assumption that people will live longer in the future and that the incidence of disability will increase, neither of which has any direct relationship to the baby boom's retirement. Much of the current debate about financing options focuses on the possible role of individual accounts and faster economic growth and ignores the fact that the major cause of the financing shortfall is the increase in life expectancy and disability incidence. As a practical matter, the fiscal implications of these two changes can be addressed through one or a combination of three basic adjustment strategies: (1) reductions in monthly benefits of some 17 to 20 percent, (2) increases in aggregate program revenues of some 20 to 25 percent, or an increase in the retirement age to roughly age 69. Accelerating economic growth will have little impact on future Social Security costs because rising real wage levels will also produce rising real retirement benefits (although faster growth may make future workers more willing to bear the tax increases required to maintain currently scheduled benefits). Taken by itself, switching to a system of individual, defined contribution accounts also will not close the financing gap. Such a change is likely, however, to cause most of the adjustment to longer life spans to occur through reductions in monthly retirement incomes rather than one of the other two types of changes; that result is less likely if the current collective, defined benefit approach to the program is preserved.
Keywords: Social Security, demographic, economic, baby boom, retire, public pension, benefits, defined contribution, defined benefit
JEL Classification: H55, I12, J10, J11, J13, J14, J26
Suggested Citation: Suggested Citation
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