Thursday, May 22, 2008

Social Security: Capacity of a PAYGO Program



How many beneficiaries can be supported for each current worker? The annual report does not directly address this question, but it is fairly easy to use the numbers to estimate it.

Workers and beneficiaries data from:
http://www.ssa.gov/OACT/TR/TR08/lr4b2.html
Income and Cost data from:
http://www.ssa.gov/OACT/TR/TR08/lr4b1.html

For 2007, divide beneficiaries (163K) by workers (49.6K) to get 0.30 'demographic' ratio
Then multiply by income rate (12.75%) and divide by cost rate (11.26%) to get 0.34 'capacity'

This gives you real demographic data to plot along with a calculated value to give a graphic view of how large the annual surplus or deficit is. It tells you how many beneficiaries you can have if the average income per worker and average cost per beneficiary stays the same. The above plot uses actual data from 1970 to 2007 and projected values from the 2008 report for Low Cost (LC) model and for Intermediate Cost (IC) model.

Some observations:
1. LC projection can support more than IC as expected.
2. For both LC and IC the capacity trend is upwards. The growing economy can support a greater ratio of beneficiaries even though they are living longer.
3. There was a rapid increase in capacity and in workers (decrease in beneficiaries per worker) in the late 90s.
4. The graph shows the 2017 date for IC and 2021 for LC when we no longer have a surplus.
5. The difference in capacity between LC and IC is much less than the difference in demographic projections.
6. The math does not account for interest income, so there is really a surplus even when the solid line is slightly above the dotted line.
7. LC demographics will lead to surpluses even with IC capacity, but IC demographics will be in deficit even with LC capacity.
8. We can grow the economy to get out of a problem with people living longer, but not out of a problem not enough workers.