Editor’s note: This article was originally published on The Hill
Social Security is arguably the nation’s most vital program. It serves an audience that does not adapt well to change. So any crisis is apt to have terrible effects.
The experts have warned us for years that Social Security is heading for such a crisis. As dire as their warnings are, what should trouble Americans is the misguided reasoning behind the warnings.
Instead of reasoned analysis consistent with a private pension, the system seems to be governed by bad data removed far from any sensible context.
This statement sounds ominous, creating the misguided impression that the program was sound only when 16 contributed for every one collecting. Thus, the program must become “unsustainable” once the ratio drops to 3 to 1 or some lesser figure.
While the information sounds useful, it does not tell you about the critical information necessary to forecast the future of Social Security. The number of workers does not tell you about the size of the economy. The number of beneficiaries does not tell you about the benefit demands of the system.
The ratio is almost useless for planning purposes because it ignores two key pieces of information. The number of workers does not tell you about the changing rate of contribution. The number of beneficiaries tells you nothing about the rising financing costs.
So roughly the same level of workers to retirees leads to two completely different outcomes. In 1983, the system was unable to maintain solvency with 3.1 workers per beneficiary. Between 1983 and 2013, the ratio improved slightly to roughly 3.2 workers which was sufficient for the system to build a nearly 2.8 trillion dollar surplus. Clearly there are broader forces at work.
In 1960, we had roughly 5 workers for every beneficiary. Today we have something closer to 3 to 1. Oh my!
This comparison however fails to incorporate the higher rates of contribution. In 1960, Social Security collected roughly 5 percent of the first $4,800 of wages, a wage less than the median income of the average family. (Buying power in 2014 of $38,000). Today the system gets 10.6 percent of the first $118,500, more than double the current median family income. If we talk about this relationship in 1960 terms, the number of workers to retirees has risen from 5 to 1 to the range of 10 to 1.
Furthermore, the ratio ignores the contribution of the Social Security Trust Fund. In 1960, the Trust Fund was tiny, generating roughly $500 million. Today the Trust Fund generates roughly $100 billion in interest revenue. At the time that Simpson-Bowles was prepared, the system received about 15 percent of its income from interest. So the Trust Fund represented roughly ½ a worker, which would bring the system back to its 30 year-average.
An even larger problem is that the number of retirees does not reflect the financing cost of past benefits. Social Security collects revenue in exchange for the promise of future benefits. In effect Social Security pays benefits with borrowed money. This process has created a massive financing cost.
While the number of retirees does not reflect the level of interest, the cost of that borrowed money is visible in the Trustees reports. Last year, Social Security created $1.8 trillion in unfunded liabilities, more than half of which was created solely because we moved the clock forward by one year. That $900 billion is the financing cost of the unfunded liabilities in the system.
The Worker To Retiree ratio is a frightening message to Americans who depend upon the system. The experts use it. The media sells it. It is basically a useless number that compliments a convenient narrative: Baby Boomers you are living too long, and not having enough children.
The experts are correct that Social Security is heading for a crisis. The problem is that the ratio of Workers to Retirees tells you almost nothing about it.