Mar 27, 2009

A graphical representation of social security's problems

Takeaway: in 1940, social security offered retirement at age 65 - but the average person didn't even live that long. 60 years later, social security's retirement age was unchanged, but the average person lived 75 years. No wonder the program is perpetually on the brink of insolvency. If a life insurance company operated this way, it would've gone bankrupt long ago. (As an aside, it would be interesting to examine purchasing power of social security benefits from 1940 versus 2000.)

This is from a 2003 paper on Demographics and Capital Market Returns that looks at the coming generational conflict between younger workers and older retirees as a result of the shifting "dependency ratio." This has serious implications for investors, who may see declining demand for stocks as people sell assets in retirement and not enough younger workers willing/able to purchase them. Their (optimistic?) conclusion is that retirement will be unaffordable at age 65 for most baby boomers, and therefore they'll keep working until their early 70s. The potential ameliorating effects of immigration, productivity, global trade, and social security reform are all discussed.

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