US Demographics to the Year 2050 and the Outlook for Social Security - Essay Example

Module U.S. Demographics to the Year 2050 and the Outlook for Social Security The aim of the US social security system is to aid the retired people financially using social security taxes contributed by the working class. This is quite an effective method of ensuring that former employees can still have a decent life after retirement. The success of the scheme highly depends on the ratio of the working class to retirees. There is one monumental challenge that the social security scheme faces; it must ensure that the income is always higher than the expenditure to ensure sustainability of the system. Using predictions that assume a low birth rate, at one time, its expenditure will have been outrun by the income generated. Consequently, in the absence of a suitable alternative source of income, the system will fail (Bergmann 2). It is, therefore, quite essential to make correct and accurate predictions, especially the ones that assume the worst-case scenarios. This prepares the system managers for the worst, and the necessary arrangements made to avoid the situation. Assuming the worst does not happen would give a moral boost for the system but will leave it unprepared for any drastic future changes (Boskin 2). The two segments that most influence the social security system are the people that fall between ages 18 and 64, and 65 years and above, representing the working class and the retired respectively. For clear analysis of the effect of the number of people in these two groups, it is essential to find the ratio of the numbers in both groups. One advantage of using this measure of comparing groups in a population is that it gives a general overview of the situation by elimination method. Consequently, the next merit of this technique i.e. simplicity is seen. It enables one to analyze complex ideas albeit with some simplicity. The major weaknesses of this method arise from the assumptions it makes. Though the official age to start working is 18 years, there are people as young as 15 and 16 who are working and thus contribute to the social security kitty. On the other hand, others reach the age of 65 and continue working, and they too contribute to the social security system. This reality compromises accuracy of this estimation method. It also ignores the contribution made by these two groups in the population (U.S. Population Projections 2020-2050 1). In cases where fertility and immigration remain low, the dependency ratio of the working class reduces against the retired citizens. This means that the number of retired people per every employed person increases. This scenario would mean disaster for the social security system as less and less people would be funding it while the number of dependents would increase exponentially (See table 1). This is the least favorable alternative to the social security system; it would mean less money would be available to fund the increased expenditure (Lee, Anderson and Tuljapurka 4). Current trends aggravate the situation as improved medical care, and higher standards of living have resulted in increased life expectancy. This, however, does not mean that the paper advocates for low life expectancy. Within the 50-year forecast, the workforce population to age ratio changes depending on the availability of new labor force to replace the retiring one (See figure 1). Based on the measure that predicts an increase in the dependency ratio caused by low population growth due to low fertility, reduced immigration and increased life expectancy, the rate of employment does not match that of retirement. This exerts undue pressure on the working population, and the balance has to be reestablished somehow, either by reducing benefits (expenditure), or by increasing income. The most likely scenario is whereby the population will increase but at a rate that would not keep up with the increasing retirees. The dependency ratio is expected to change from 4.88 in 2000 and will reach nearly 2.7 by 2050. This means that each dependent will be taken care of by taxes paid by less than three people in 2050. This also means that the ratio decreases steadily over the years, the only result being more pressure on a lowly replenished social security system (U.S. Population Projections 2020-2050 1). STRATEGIES TO SAVE THE SOCIAL SECURITY SYSTEM There are two approaches to prevent an imminent collapse of the social security system; by increasing sources of income for the system, and reducing expenditure. The former involves strategies that increase the income to the system, for example, size of the labor force by adjusting the retirement age and admitting more immigrants into the country. The other option is increasing the amount of social security taxes paid by those in the working class. The latter involves strategies to reduce the spending capacity of the system by reducing benefits paid to retirees. Adjusting the retirement age. Adjusting the retirement age to 70 instead of 65 would be beneficial as not only increases the source of income for the scheme, but also reduces the load for the working class by shifting from being dependents to tax payers (See table 2). In addition to adjusting the retirement age, senior citizens should be encouraged to join the working class by offering to them incentives including day offs from work and easier access to funding. This strategy would work only in the short run as it is impossible to predict the effect of going back to work for the aged (Diamond and Orszag 2). Maternal factors. For the nation to have an effective working class in the future maternal care should be enhanced. Incentives should be given to families to increase their birth rate but in a controlled manner. These incentives include free health care and free education to children coupled with increased employment rates. In the long term, this method will ensure that the social security system has adequate income to service all disbursements to retirees. Global economic crisis and increased unemployment aside, the developed world is experiencing a shortage of skilled workforce mainly due to perpetual decrease in birth rates. As a result, the developing countries are bridging the gap through immigration. Tax increase. Another way to increase the supply of funds for the social security is by increasing taxes levied on the working class. Increasing taxes is beneficial to the economy in the short term but harmful in the long term as it reduces the purchasing power of the working class who in turn spend hugely. Lowered spending limits the amount of money in the circulation, which does not sound right especially now when most economies are struggling including here in the United States (Diamond and Orszag 2). Immigrants. Programs that allow import of labor into the country should be encouraged. Incentives like decent job opportunities offered to citizens of less financially able countries would encourage them to move to this country, especially through expansion of the American Green Card program. Immigrants who come to the country for a period of less than two years benefit the social security system for a short time before going back to their countries. The government should abolish restrictions to qualifying candidates. For instance, granting young professionals citizenship without much delay and bureaucracy, and requiring higher qualifications from the older immigrants will ensure a bigger pool of legitimate and valuable contributors to the system. In addition, the government should encourage and facilitate immigrant workers to further their studies. Firms and businesses that employ them should reciprocate by increasing their wages, which will increase their tax contributions. Though they should be encouraged to learn, offering immigrants citizenship is the best option since few will have the desire to go back to their countries thereby ensuring long term contribution to the social security system. External borrowing. Borrowing money from international foundations like the IMF, the World Bank forms the other option. This is even more encouraging as it is easy to secure credit for the country considering its strong credit history. However, since it is impossible to predict accurately other factors that affect the economy, there should be caution in considering this option. Even if there were to be positive changes in the economy and demography of the country, future generations would have to deal with the heavy burden of paying off debts whose interests keep rising (Diamond and Orszag 3). Domestic borrowing. The government can seek for funds domestically by offering government bonds at attractive rates. This way the government is able to seal its budget deficits while citizens will have the opportunity to invest. Domestic borrowing is, however, tricky especially where the government has a large budget deficit and when economy is not likely to improve drastically in the short term (Myers 3). The reason for this is that interest on bonds has to be paid irrespective of economic conditions. Government projects. The government would start income generating projects, which also create jobs and whose proceeds would be used to take care of the aging population. This is the most viable of all strategies if diligently executed. Vigilance should be observed to ensure funds are not appropriately allocated to ensure maximum benefit. CONCLUSION Demographic patterns are bound to change, and the US may soon start importing labor in larger proportions than expected. It is, therefore, quite essential that stakeholders formulate strategies to reduce or alleviate dependence on the working class to take care of retirees. Although the economy is not at its best shape, and it is expected to be like this for some time, sound options still exist. Some of them include adjustment of retirement age, adjustments in the taxation policies and government investment in income generating projects that also create jobs. The various benefits and misgivings of these changes should be analyzed keenly for their long term effects before implementation,. Works Cited Bergmann, Barbara R. The Economists’ Voice: Could Social Security Go Broke?. Berkeley: The Berkeley Electronic Press, 2005. Print. Boskin, Michael J. The Economists’ Voice: Straight Talk on Social Security Reform. Berkeley: The Berkeley Electronic Press, 2005. Print. Diamond, Peter A., and Orszag, Peter R. Saving Social Security: The Diamond-Orszag Plan. Berkeley: The Berkeley Electronic Press, 2005. Print Lee, Ronald, Anderson, Michael and Tuljapurka, Shripad. Stochastic Forecasts of the Social Security Trust Fund. UC Berkeley :Institute of Business and Economic Research, 2003. Print. Myers, Dowell. Written Testimony. 2007. Print. U.S. Population Projections 2020-2050. Print. Figure Reference Figure 1: Graph showing old age dependency ratio (65+/20 – 64 populations) Source: Ronald Lee, Michael Anderson, and Shripad Tuljapurka (2003). Stochastic Forecasts of the Social Security Trust Fund. Institute of Business and Economic Research, UC Berkeley. This graph shows a clear visual representation of the gradual increase in dependency ratio. It shows that 2050 will just be the start of imbalance between the social security income and expenditure. Table Reference Table 1: Table showing the exponential increase in the number of dependents versus the working class Table 2: Table showing dependence ratios if retirement age is adjusted to 70 Source: Internet release date January 13, 2000, U.S. Census Bureau These tables (tables 1 & 2) show demographic changes are bound to happen. However, the changes will happen much later if retirement age is adjusted to 70. This shows that though change in retirement age is an option, other options must be pursued, as this one does not show reliability in the long term. Read More