Social Security: the laws of thermodynamics still hold

You’ve heard all the hyperbole about Social Security going bankrupt, or broke, or whatever. If you still haven’t figured out how ridiculous that is, research pay-as-you-go plans. The system doesn’t run out of money unless the number of working people goes to zero. Chances are there will be far more serious things to worry about if that ever happens.

Here’s a very simple way to think about Social Security: every working person supports herself or himself along with some number of other people – dependents and people collecting Social Security. How many people? Less than two.

You may also have heard that, because of baby boomers (you know, the generation that made America rich but are now portrayed as economic parasites), the number of people collecting Social Security will soon far outnumber the number of working people. An incredibly improbable scenario, given what we know of the biology of the human species and, for that matter, the laws of thermodynamics.

But skipping over heat death analogies of our economic future, let’s just look at some numbers. Or, better yet, a graph made from some numbers. The numbers are from the Census Bureau’s 2014 population estimate.

Retirees

The pair of lines at the bottom represent the ratio of retirees to workers over the next 44 years. Yes, it is increasing – from about 0.26 in 2012 to about 0.41 in 2060. That’s about 3 retirees for every 12 workers in 2012, to about 5 retirees for every 12 workers in 2060. This, by the way, is not the actual number of retirees, it’s the population aged 65 and above. Many of those people will continue to work, so this is a worse case scenario, basically.

In the meantime, American families are getting smaller at about the same rate, as shown in the pair of lines marked Dependents. The average number of dependents per worker will go from about 1.78 in 2012 to about 1.57 in 2060. When you add them together it means that a worker in 2012, who supported an average of 2.04 people, will be supporting 1.99 people by the year 2060. These are the lines at the top.

This is the culmination of a trend that started a long time ago. Multigenerational families are disappearing as retirees become increasingly self-supporting through both private retirement insurance (e.g. 401k) and public retirement insurance (Social Security). Households are seeing financial and social benefits of bearing less of the support for older family members at the same time that they are choosing to have smaller families. And, even while trading some of the costs of raising children for the costs of supporting parents, households will still manage to lower their overall burden in terms of the number of individuals supported.

And why are there two lines for each group in the graph? Before the 2008/2009 Great Recession, labor force participation was about 66% (down from an all time high of 67%). That is, 66% of Americans aged 16 and above were working or actively looking for work. Through the recession and after, labor force participation fell to nearly 62% before rebounding slightly.

laborforce

There is some evidence that this new lower level of labor force participation is a structural change. That is, many American households have elected to step back from all adults earning full time incomes yet amassing tremendous consumer debt. Young families are opting for simpler lifestyles.

Returning to the dependents graph at the top of the page, the scenario where labor force participation rebounds to 66% is portrayed with dashed lines. And the scenario where labor force participation stays at 62% is shown with the solid lines. Either way, the laws of thermodynamics are not violated – we do not suddenly dissipate all the economic energy of 154 million American workers, nor do 40 million retirees create a black hole into which all that energy is sucked without a trace.