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Social Security: Yahoo Just Explains It Wrong

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Friday, 09 November 2012 08:32

Yahoo’s short “Just Explain It” video on Social Security seriously misrepresented the financial situation of the program. The segment misled viewers on both the magnitude of the demographic  changes affecting  the programs finances and also the impact of the projected shortfall.

 The piece told viewers:

“Back in 1950, there were 7.11 workers per retiree. That number today is 4.5 and in 30 years, economists estimate that number will be 2.6 workers for every retiree.”

The Social Security trustees report actually puts the ratio of covered workers to retirees at 16.5 to 1 in 1950 and just 2.8 in 2012. It is projected to be 2.2 in 30 years.

The difference is important because most of the drop in the ratio of workers to retirees has already occurred. Astute readers will note that on average workers and retirees both enjoy considerably higher living standards today than in 1950 in spite of the sharp decline in the ratio of workers to retirees.

The reason this happened is that the impact of productivity growth swamps in raising living standards swamps any negative impact of demographic changes in lowering living standards. As the chart below shows, the gains from even modest rates of productivity growth vastly exceed the impact of the projected decline in the ratio of workers to retirees.  

alt

                       Source: Social Security Administration and author's calculations.

 

It is true that most workers have seen little benefit from the gains in productivity growth over the last three decades. This has been due to the huge upward redistribution of income over this period. If this pattern continues then there will be grounds for worrying about the living standards of most of our children and grandchildren. However, this highlights the need to address the policies that have increased inequality and not to waste time worrying about demographic issues.

Finally the piece badly misrepresents the meaning of the shortfall in the Social Security trust fund projected for 2033. This projected shortfall does not mean that the program would pay zero benefits, it means that it could only pay about 75 percent of scheduled benefits (closer to 80 percent in the Congressional Budget Office projections).

Because benefits are projected to rise through time, this would still be a larger benefit than most retirees receive today. More importantly, it is almost inconceivable that in a country where beneficiaries comprise 25 percent more of the voting population than at present that Congress would sit back and do nothing when Social Security could no longer pay full benefits.

If we actually reached this point, most likely there  would be some emergency commission established to work out a solution as happened when the program faced a shortfall in 1982. No one ended up missing a check. Since the size of the projected shortfall is smaller relative  to the size of the economy than the annual costs of the Iraq and Afghanistan wars, it should not be that difficult to figure out how to come up with the money.

In short, Yahoo has given a late Halloween scare story. It has not explained Social Security to its readers at all.

Comments (14)Add Comment
Yahoo has company
written by A.J. Grund, November 09, 2012 9:38
It would be nice if it were only yahoo.com that was misinformed regarding the facts of key economic issues rather than virtually every media outlet in America.
2 workers....
written by pete, November 09, 2012 10:27
Round to 2. Forget about the source of my checks. The whole disgrace of politics and taxes and benefits is that they are linked. Economists on the other hand delink taxes and spending. Taxes should be efficient, for example non distortionary and hopefully Pigovian when needed. Spending should be for public goods, perhaps including insurance, not guaranteed annuities for the elderly and disabled.

Back to SS. Basically I will get $30,000 a year. That's $15,000 from my two workers. That's what, about 30% of GDP being transferred from workers to retirees. But Dean is correct. In the 80s they raised the flat part of u.s. revenues, the so called payroll tax, and took away younger retirees benefits, forcing us to work a few more years. I guess you are saying that this likely this will happen again.

Best part of a flat tax increase is that it is relatively non-distortionary, similar to the recently passed head-tax for health care. Could raise the flat tax a bunch, and perhaps put $1 to $3 per gallon of gasoline, stop building Rachel Maddow's highways to the suburbs, bring home the troops (oops only 1% voted Green/Libertarian to get out of the middle east)..ta da economic problems solved.
...
written by skeptonomist, November 09, 2012 11:42
Looking only at the ratio of retired to working distorts the issue greatly, because it does not take account of the fact that non-working children must also be supported by workers (as Dean has mentioned before). The fraction of working age (18-64) in the population has varied narrowly between the limits of 0.56 and 0.63 since 1900, and in 2050 it is projected to be about the same as in 1900:

http://www.skeptometrics.org/RealDemographics.html
Leave it to beaver
written by TVeblen, November 09, 2012 4:17
Back in the late 1950s, my dad was a relatively new teacher and was able to support a family of 5 on his salary. OK, so back then we had about 15 workers for every retiree while each of those 15 workers supported their families AND all the retired folks to boot. Try supporting a family on what the avg. teacher makes today. There's your real financial burden!
Senior Power!
written by geraldmcgrew, November 09, 2012 10:12
"...it is almost inconceivable that in a country where beneficiaries comprise 25 percent more of the voting population than at present that Congress would sit back and do nothing when Social Security could no longer pay full benefits."

Indeed Dean! I remember reading an article in Tikkun during the '90s by the late, great social critic Theodore Roszak contending that rather than fearing the fate of seniors when baby boomers retire, we should actually appreciate the potential political power they will have as one of the largest constituencies in the country. Far from causing the demise of programs protecting seniors, baby boomer retirement should actually herald the institution of massive upgrades of such programs.

Of course, this potential political power will have to be organized in order to be realized. As usual, progressives suffer not from a lack of intellectuals like Dean, but from a lack of organizers who know what to do with what our greatest intellectuals tell us.
...
written by urban legend, November 09, 2012 11:54
Keep in mind that all of these things are projections based on various assumptions. In particular that applies to the projection that 20, 25 or 30 years from now when the Baby Boom surplus is finally used up, as intended by the Greenspan Commission 30 years ago, the system "will" be able to pay only 75 or 80% of currently projected benefits, is based on a projection about how much people will be making and how much revenues will be. All the confidence often displayed about what "will" happen that far into the future is entirely misplaced. Any such statement not modified by the words "based on current projections" is highly irresponsible.
...
written by liberal, November 10, 2012 10:21
pete wrote,
The whole disgrace of politics and taxes and benefits is that they are linked. Economists on the other hand delink taxes and spending. Taxes should be efficient, for example non distortionary ...


If you're not a dishonest hack, can you explain your comment the other day apparently denigrating land value taxation, given that it's both equitable and 100% non-distortionary?
...
written by liberal, November 10, 2012 10:25
pete wrote,
Best part of a flat tax increase is that it is relatively non-distortionary...


To the extent that high incomes come from economic rents, progressive income taxes aren't as distortionary as people claim they are.
...
written by liberal, November 10, 2012 10:30
pete wrote,
..ta da economic problems solved.


Nope. If a huge fraction of the economy is being plundered by the elites via rent extraction, you're screwed regardless of other measures. (Not to say I'm opposed to saving money by bringing the troops home.)
...
written by okie famrer, November 10, 2012 10:55
I've noticed that yahoo! is rather like the WSJ, or WaPo on pretty much any issue.
We continue to forget that Companies pay into the system
written by jumpinjezebel, November 10, 2012 12:59
Using the worker to beneficiary ratio to raise alarm is forgetting that Companies pay half of the FICA tax. Or am I missing something.
San Jose, CA Raises Minimum Wage to $10/hour
written by AntiJohn Galt, November 11, 2012 12:32
San Jose, CA just voted (59% for, 41% against) to raise the Minimum Wage to $10/hour in 2013 and index it to inflation in subsequent years. How much would a measure like this help SS if it was implemented at the national level? California also does not have a sub-minimum wage for tipped staff at restaurants.
Rising productivity and flat real wages
written by Mike B), November 13, 2012 4:10
Some political questions: Where does all the productivity go? Who produces all the wealth not found in natural resources? Who is entitled to enjoy the wealth which is the result of productivity? Which side of the class line are you on?
Low cost assumptions....
written by AndrewDover, November 16, 2012 9:39
The intermediate projection of the SS trustees for 2035-2080 is 2.0 (Not 2.2)

http://www.socialsecurity.gov/...ml#222190

The article wrote:
"The Social Security trustees report actually puts the ratio of covered workers to retirees at 16.5 to 1 in 1950 and just 2.8 in 2012. It is projected to be 2.2 in 30 years."

2.2 could arrive only from a low cost projection, which make the following assumptions:

Table II.C1.—Long-Range Values? of Key Demographic and Economic Assumptions for the 75-year Projection Period

Fertility (children per woman), starting in 2036
Intermediate 2.0
Low cost 2.3
High Cost 1.7

Average annual percentage reduction in total age?sex?adjusted death rates from 2011 to 2086
Intermediate .77
Low cost .39
High Cost 1.18

Average annual net immigration(in thousands)for 2012?86
Intermediate 1,080
Low cost 1,375
High Cost 790

It seems doubtful that all low cost assumptions will occur, so I tend to believe the intermediate assumptions.



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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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