Richard Westall’s 1812 painting, Sword of Damocles. Think “Obama” for Dionysius II of Syracuse (standing) and John Boehner as Damocles (sequestrated and seated), or the reverse as you prefer.
In the previous 99%’er I pointed out that as time passes, people grow older. I pursue that insight in this one, to demonstrate that the average age of the US population is not the sword of Damocles hanging over our federal finances (see graphic). We seem to have a lot of people who think that Americans growing old is a problem. For example, the never-out-flanked-on-its-right American Enterprise Institute (AEI) tells us about an “ageing bomb”,
Spending on the [US] government’s three main entitlement programs–Social Security, Medicare, and Medicaid–is projected to rise significantly in coming decades. If left unaddressed, these increases put the government’s budget and the American economy at risk. (emphasis added, American Enterprise Institute, http://www.aei.org/outlook/28443)
The first two “entitlements” are programs for sexagenarians and older providing retirement and health benefits that are funded by ear-marked taxes (currently 1.45 percent for Medicare and 4.2 for Social Security, the later soon to return to its pre-2011 rate of 6.2). The idea seems to be that when we have more old people (for example, me), the proportion of Americans in work declines and the proportion of those receiving benefits rises. Briefly stated, more useless old codgers living off hard-working Americans. As former Wyoming Senator Alan Simpson put it, “social security is a milk cow with 310 million tits”. Since 310 million was the total population of the 50 states and Puerto Rico when he made that statement, it is not clear who the ex-Senator thought was working to feed the eponymous “milk cow” (other than himself).
All of us drawing social security may be a bunch of feckless suckers as the ex-Senator suggests, but the basic hypothesis of the benefit cutters, that an older population places a growing burden on the ultra-eponymous “tax payer” is false. This is yet another example of Stuart chase’s famous phrase, “commonsense is that sense that tells us the world is flat” (some award Chase the distinction of coining the term “New Deal” for FDR’s 1932 campaign). Seems so sensible, the idea that an aging population creates a burden, until we inspect it.
A first indication that nonsense lurks here comes if we substitute “younger” for “older”. Who thinks that a growing proportion of non-working children in the population would “put the American economy at risk”? Those who think so might start work on developing a way for humankind to reproduce itself without children (for their research I recommend The Children of Men by P. D. James in which the population of the world becomes infertile). We might wonder if the American Enterprise Institute and ex-Senator Simpson have in mind voluntary euthanasia for pensioners (again, Ms James provides insights).
If we take the ageing-is-a-threat argument seriously, we would expect to discover that because the average age of US population has increased (and, therefore, those over 60 and 70), the share of people in the population at work should be falling (“participation rate”, the employed plus those seeking work, the unemployed). As the chart below shows, no such declining trend has occurred, either for men or for women.
From 1965 to about 1980-1981, the participation rate for men did, indeed, decline. Then, the decline ended, with the male working rate for all practical purposes constant for over 25 years, 1980-2007. Meanwhile the female participation rate rose, from below forty percent in 1965 to over 55 percent in 2000. It too leveled off. During 1980-2007 the average age of the US population increased from about 33 to 37, and the overall participation rate increased, from 61 percent to 64 percent. Why the male participation rate stabilized even though the average age rose is not hard to answer: people working longer and retiring later, and a smaller proportion of children in the population.
But what happened after 2007, then participation rates dropped dramatically? Is this the dire warning of the AEI coming true? If so, Americans suffered a sudden rapid ageing during 2007-2011, which, to my knowledge, we did not. The answer lies in well-known and well-documented behavior, people abandoning hope of finding a job when unemployment is high. Participation fell because people could not find work. QED as they say in Latin.
Percent of US population over 16 that is in the labor force, 1965-2011
Note: Full time students excluded.
One way people kept body and soul together without employment was to retire if they could, which we can see in the next chart. After being a near-constant percentage of national income (GDP, gross national product) for almost thirty years (4.3 percent in 1980 and again in 2007, with a peak of 4.6 in 1992), benefit payments increased to almost five percent during 2009-2011. Unable to find a job, people near or above retire age retired.
Meanwhile, the revenue that funds these benefits, the social protection payroll tax, declined because fewer employed people means fewer paying the tax (dashed line, right around 6.4 percent for over 25 years before falling in 2009). During 1980-2007 the revenue from the taxes ear-marked for Social Security and Medicare slightly exceed the payments for both programs (a 28 year surplus of $68 billion for an expenditure of $13.3 trillion). If you think keeping the budget balanced is good practice, complement the Social Security and Medicare programs. No ageing bomb in sight.
Payroll tax revenue, Social Security payments and Medicare expenditures, 1980-2011
Just to make my point blindingly obvious, I offer one more diagram, that shows the same surplus/deficit in the combined Social Security and Medicare programs and the unemployment rate. These two programs combined went into deficit because the unemployment rate rose from 4.5 percent of the labor force in 2005 to 9 percent in 2011 (passing through 9.6 in 2010). If we do some simple statistics, we discover that, yes, an ageing population tends to nudge Social Security and Medicare towards a lower surplus or deficit in the long run. However, the contribution of labor force ageing was trivial to the change in the expenditure/tax balance for the two programs from a mini-deficit of one-third of one percent of national income in 2005 to substantial minus 2.6 percent in 2011. The cause lay not in an ageing population. It resulted from rapidly rising unemployment and Obama’s cut in the payroll tax from 6.2 to 4.2 percent for 2010.
Surplus or deficit on Social Security and Medicare programs and the unemployment rate, 1963-2011
Note: Read the surplus or deficit for the Social Security and Medicare programs on the left vertical axis, and the unemployment rate on the right axis.
An ageing population need not, is not and will not place a dangerous burden on federal finances. That faux burden is the pernicious nonsense of the reactionary Right, shamelessly accepted by many Democrats in Congress. Even if it were true (which it is not), it would not seen as a problem in a decent society organized for the good of the 99%. Unlike a private pension program the federal government imposes no brokerage charges and assumes all market risk itself. No one has ever come up with a better way to provide a dignified and decent retirement. Every year Social Security payments keep millions from poverty. Long may it do so.