Friday, January 25, 2008

Looking at Social Security in a Different Light

I found this to be interesting:
Most economists will tell you that the real problem with Social Security is demography. (Here's William Poole). The fraction of people over 65 will keep rising, implying a growing dependency ratio.

The problem is that this is only the ratio of retirees to working-age people. But wouldn't a better measure of dependency just be the ratio of workers to people? When you think about it this way, the aging of the population is balanced by (a) the fall in the fraction of children, and (b) the rise in female labor force participation. As one website that I wouldn't normally like explains:

It's the overall dependency ratio—–the number of workers relative to all non-workers, including the aged, the young, the disabled, and those choosing not to work—that determines whether society can "afford" the baby boomers' retirement years. In the 1960s we had 1.05 workers for each dependent, and we were building new schools and the interstate highway system and getting ready to put a man on the moon. No one bemoaned a demographic crisis or looked for ways to cut the resources allocated to children; in fact, the living standards of most families rose rapidly. In 2030, we will have 1.27 workers per dependent. We'll have more workers per dependent in the future than we did in the past. While it is true a larger share of total output will be allocated to the aged, just as a larger share was allocated to children in the 1960s, society will easily produce adequate output to support all workers and dependents, and at a higher standard of living.
Hmm, I hadn't though about that.

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