For other versions of this document, see http://wikileaks.org/wiki/CRS-RL32981 ------------------------------------------------------------------------------ ¢ ¢ ¢ ¢ Prepared for Members and Committees of Congress ¢ ¢ ¢ ¢ The aging of the population of the United States, hastened by the impending retirement of the huge baby-boom generation, has caused some policy-makers to question whether the U.S. Social Security system can meet the demands for retirement benefits in the future. The financial health of the system, which is largely financed through payroll taxes paid by current workers in a pay- as-you-go manner, is sensitive to the ratio of dependents to workers--sometimes called the age dependency ratio or support ratio. Trends and projections of dependency ratios, including the relationship between both older (years 65 and older) and younger (under age 20) dependents to the working-age population in the United States are considered in the first section of this demographic report. If one considers the 130-year period from 1950-2080, the greatest demographic "burden"--when the number of dependents (children plus the elderly) most exceeds persons in the working-age population--is already in the past, having reached its height in 1965 when there were 94.7 dependents per 100 persons of working age. While the dependency ratio has generally been decreasing since that time, two trends are evident. First, the ratio of dependents to workers will again reverse course beginning around year 2013 with the retirement of a large number of baby boomers. Second, the composition of the dependency ratio is changing. The number of children per worker has been falling since 1965; most of the anticipated increase in the dependency ratio in the coming decades reflects a growing proportion of older persons (ages 65 and older). Age-specific trends in the age dependency ratios are not off-setting in terms of their federal budget implications. Programs administered by the federal government (especially Social Security and Medicare) focus much more heavily on assisting the elderly population whereas state and local governments have historically provided substantial support for families with children through spending on elementary and secondary education and other programs. Next, the United States is compared to nine other nations. Seven of the countries are members of the G8, a consultative grouping of leading industrial democracies: Canada, France, Germany, Italy, Japan, Russia, the United Kingdom. (The United States is the 8th member). In addition, China and India, the two most populous countries globally, are included to highlight that population aging is occurring even in nations that are less industrialized and have "younger" current age structures. Population aging, which largely results from declining fertility rates and increasing survival, is a global phenomenon. Today, the United States is the "youngest" of the industrialized G8 nations. While the proportion of the U.S. population that is aged 65 and older will continue to increase, aging in the United States is still projected to be considerably slower than in any of the other industrialized countries. In the final section, policy implications of the changing dependent-to-worker ratios are considered in the context of pay-as-you-go (paygo) social security systems. This report will be updated every two years. ¢ ¢ ¢ Background ..................................................................................................................................... 1 Age Dependency Ratios .................................................................................................................. 1 Definitions................................................................................................................................. 1 Trends........................................................................................................................................ 2 Older Dependents................................................................................................................ 3 Child Dependents................................................................................................................ 4 Some Take-Away Messages................................................................................................ 5 Variability of Future Projections ............................................................................................... 6 An International Comparison: Is the American Situation Unique?................................................. 7 Implications for a Paygo Social Insurance Program ......................................................................11 What is Paygo?.........................................................................................................................11 What Made Paygo an Attractive Option for Financing Social Security Systems?.................. 12 The Current Outlook for Paygo, Given Demographics and Other Factors ............................. 12 Figure 1. Dependency Ratios: Number of Dependents Per 100 Persons of Working Age, United States: 1950-2080 ............................................................................................................. 3 Figure 2. Total Projected Dependency Ratio, 2005-2080, Under Three Sets of Assumptions of Future Mortality, Fertility, and Immigration ...................................................... 7 Figure 3. Number of Older Dependents per 100 Persons of Working Age in Selected Countries, 2002 and 2025............................................................................................................. 8 Figure 4. Number of Child Dependents per 100 Persons of Working Age in Selected Countries, 2002 and 2025........................................................................................................... 10 Figure A-1. Number of Working Age Persons Per 100 Dependents, United States, 1950- 2080............................................................................................................................................ 18 Table A-1. Age Dependency Ratios, United States, 1950-2080 .................................................... 14 ¡ Appendix. ...................................................................................................................................... 14 Author Contact Information .......................................................................................................... 19 ¢ ¢ ¢ Social Security's financing problems ... are very large and serious. People are living longer, the first baby-boomers are nearing retirement, and the birth rate is low. The result is that the worker-to-beneficiary ratio has fallen from 16.5-to-1 in 1950 to 3.3-to-1 today. Within 40 years it will be 2-to-1. At this ratio there will not be enough workers to pay scheduled benefits at current tax rates.1 As highlighted by the Social Security Administration (SSA), the aging of the (United States) population, hastened by the impending retirement of the huge baby-boom generation,2 has caused policy-makers to question whether the U.S. Social Security system can meet the demands for retirement benefits in the future. Because the current system largely pays benefits through taxes paid by current workers,3 the financial health of the system is sensitive to the ratio of dependents to workers--sometimes called the age dependency ratio or support ratio. Trends and projections of dependency ratios, including the relationship between both older (years 65 and older) and younger (under age 20) dependents to the working-age population in the United States are considered in the first section of this demographic report. Next, the United States is compared to nine other nations, including the seven other members of the G8.4 In the final section, policy implications of the changing dependent-to-worker ratios are considered in the context of pay-as- you-go (paygo) social security systems. ¢ This section summarizes information on trends and projections over time in the ratio of working- age persons to persons in the dependent ages in the United States for the period 1950-2080. The age-dependency ratio relates the number of persons in "dependent" ages (defined here as persons under the age of 20 and over age 64) to those in "economically productive" ages (20-64 years) in the population. It addresses the question of how many dependents are being supported per 100 persons of working age.5 The age-dependency ratio is divided into old-age dependency (the ratio of persons 65 years and older to those in the working ages 20-64) and child dependency (the ratio of people under age 20 to those ages 20-64).6 1 Social Security Administration, Social Security's Future--FAQs, Frequently Asked Questions About Social Security's Future; Question: I hear that Social Security has a big financial problem. Why? at http://www.ssa.gov/qa.htm, accessed Oct. 20, 2006. 2 Americans born in years 1946 to 1964. 3 This is often referred to as a pay-as-you-go (or "paygo") system. 4 The G8 is a consultative grouping of leading industrial democracies--Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States. 5 Alternatively, one could ask how many workers there are to support each dependent. A graph of these trends, which is not analyzed in the text of this report, is provided in Figure A-1. 6 These age breaks are arbitrary. These are the age breaks used by the SSA in its reporting of the status of the Social Security trust funds. The age at which a worker could receive full Social Security benefits (the full retirement age, FRA) was, until recently, age 65. The FRA will gradually rise from 65 to 67 years beginning with people who attained (continued...) ¢ ¢ ¢ Based on data contained in the Annual Report (2006) of the Federal Old-Age and Survivors Insurance and Disability Insurance ("Social Security") Trust Funds,7 Figure 1 shows the estimated and projected trends in age-dependency ratios for the period 1950-2080 in the United States. Ratios for years 1950-2005 are historical estimates based on actual data8; years 2006-2080 are model-based projections that rely upon assumptions about future trends in mortality, fertility, and immigration. A detailed table with the underlying population data and age dependency ratios for years 1950-2080 is provided in Table A-1. Data in this section and in Table A-1 reflect the Social Security actuaries' intermediate assumptions (i.e., their best guess) of future trends in the underlying assumptions. The impact of variability in the assumptions used for the projections is considered later in this report (Figure 2). As seen in Figure 1, there were 72.5 dependents per 100 persons of working age in 1950; of these, 58.7 dependents were children while 13.8 were older persons. The total dependency ratio reached its height in 1965, just after the last of the Baby Boom generation was born. In 1965, there were 94.7 (of which 76.5 were children and 18.2 were older persons) dependents per 100 persons of working age. There have been divergent trends for the child and old-age dependency ratios in recent decades with the child ratio generally falling and that of older persons increasing. Children continue to out-number older persons in their contribution to the total dependency ratio in 2006 by a sizable margin: there are 45.9 child and 20.3 older dependents per 100 persons of working age. (...continued) age 62 in 2000 (those born in 1938). See CRS Report 94-622, Social Security: Raising the Retirement Age Background and Issues, by Geoffrey C. Kollmann. 7 2006 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, May 1, 2006, available at http://www.ssa.gov/OACT/TR/TR05/tr06.pdf, accessed Oct. 20, 2006. (Hereafter cited as Trustees Report, 2006.) 8 Note that data for 2003, 2004, and 2005 are preliminary. ¢ ¢ ¢ gnikroW fo snosreP 001 reP stnednepeD fo rebmuN :soitaR ycnednepeD .1 erugiF 0802-0591 :setatS detinU ,egA eht fo tropeR launnA 6002 :ni selbat lacitsitats no desab sisylana )SRC( ecivreS hcraeseR lanoissergnoC :ecruoS ,6002 ,1 yaM ,sdnuF tsurT ecnarusnI ytilibasiD dna ecnarusnI srovivruS dna egA-dlO laredeF eht fo seetsurT fo draoB .6002 ,02 .tcO dessecca ,fdp.60rt/60RT/RT/TCAO/vog.ass.www//:ptth ta elbaliava :setoNot srefer ega gnikrow ;redlo dna 56 ega dna 02 ega rednu noitalupop eht ot srefer "stnednepeD" era 0802-6002 sraey ;atad lautca no desab era 5002-0591 sraey rof soitaR .evisulcni 46-02 sega snosrep snoitcejorP .noitargimmi dna ,ytilitref ,ytilatrom ni sdnert erutuf tuoba snoitpmussa nopu yler hcihw snoitcejorp .snoitpmussa etaidemretni s'ASS esu The old-age dependency ratio has generally been increasing since 1950. The baby-boom generation (persons born between 1946 and 1964) will accelerate the rate at which the old-age dependency ratio changes. Baby boomers will begin to attain age 65 beginning in 2011 (for those born in 1946) and continuing through 2029 (for those born in 1964). As highlighted in Figure 1, the older age dependency ratio will quickly increase as a result of the aging of the baby-boom generation, from about 21.2 to 34.3 older dependents per 100 persons of working age between 2011 and 2029. Population aging,9 however, will continue to be one of the most important defining demographic characteristics of the U.S. population, even after the youngest of the baby- boom generation passes away.10 The number of older dependents per 100 persons of working age will continue to increase, albeit at a slower pace than will be experienced during the years in which the baby boomers retire. Based on the SSA Trustees' current assumptions, there will, for instance, be 42.1 older dependents per 100 workers in 2080. 9 As measured by increases in the median age of the population and increases in the proportion of the population aged 65 and older. 10 See CRS Report RL32701, The Changing Demographic Profile of the United States, by Laura B. Shrestha. (Hereafter cited as CRS Report RL32701). ¢ ¢ ¢ These trends reflect forecasts of continuing improved survival at the older ages and continuing low fertility rates.11 Increasing rates of survival mean a greater number of older ?soitaR ycnednepeD erA lufesU woH dependents (the numerator of the ratio), which elpmis a si oitar troppus a fo noitinifed dradnats ehT ehT .spuorg ega daorb ni snosrep fo rebmun eht fo oitar in turn increases the old-age dependency ratio. ega gnikrow fo elpoep eht rehtehw tcelfer ton od soitar Fewer (than current) births will mean fewer eht rehtehw ro evitcudorp yllacimonoce yllautca era young dependents in the short-run, but will .tnedneped yllacimonoce era nerdlihc dna nosrep redlo translate into fewer future workers in about dna yllaicnanif era snosrep redlo ynam ,ecnatsni roF two decades. At that time, the net effect will laitnatsbus era ereht saerehw tnednepedni yllacisyhp ton yam ohw noitalupop ega-gnikrow eht fo snoitrop be that the old-age dependency ratio will be ot elbanu ,deyolpmenu era yeht esuaceb semocni nrae increasing (as the number of dependents will robal eht fo tuo detpo evah ro ,nosirp ni ,loohcs ni ,krow be increasing in the numerator) while the .ecrof number of working age persons to support -artni sa hcus srotcaf edulcni ot tluciffid si ti hguohtlA them will be falling (in the denominator). laicos fo erusaem llarevo na ni ecnatsissa laicnanif ylimaf From the perspective of the Social Security tnemyolpme redisnoc ot elbisaef si ti ,troppus program, the old-age dependency ratio is the ega tnaveler eht ni snoitalupop eht fo scitsiretcarahc "noitalupop evitca yllacimonoce" eht fo setamitsE .spuorg most critical of the dependency measures as it egareva rof tnuocca ot detsujda rehtruf eb nac relates the number of potential Social Security ,tpiecer noisnep fo slevel ,sega tnemeriter beneficiaries ($ outlays) to the number of dna ,seitilibasid fo ecnelaverp eht ,noitazilanoitutitsni projected payroll tax payers ($ income). Thus, .srotcaf rehto the lower the old-age dependency ratio, the dna ,allesniK .K morf detpada neeb sah noitamrofni sihT lower the dollars paid out versus received, and ",sseccuS fo egnellahC ehT :gnigA labolG" ,spillihP .R .D the better the finances of the Social Security .5002 .raM ,1 .on ,06 .lov ,nitelluB noitalupoP program outlook. Referring again to Figure 1 and Table A-1, the child dependency ratio increased from 58.7 to 76.5 child dependents per 100 working age adults between 1950 and 1965, largely reflecting the birth of the baby-boom generation. Since 1965, the child dependency ratio has experienced a mostly steady decline due to falling fertility rates in the United States. Nonetheless, in 2006, the number of child dependents is more than double the number of older dependents--45.9 and 20.3 per 100 working age adults, respectively. The SSA Trustees' current projections assume that child dependency ratios will slowly decline through year 2080 but that the rate of decline will be very slow. Child dependency ratios will stay in the narrow range of 43.9 to 45.9 child dependents per 100 working age adults throughout this 75-year time span. Note that, even with the pending retirement of the baby-boom generation, the number of child dependents has and will continue to be greater than the number of older dependents in each of the years of the time frame considered here. 11 Note that improved population survival and decreased fertility are the root causes of the aging boom though immigration also contributes to trends in dependency ratios over time. Immigration is currently and is projected to remain over-shadowed by the trends in mortality and fertility in the dependency ratios. See CRS Report RL32701, The Changing Demographic Profile of the United States, by Laura B. Shrestha. ¢ ¢ ¢ ¢ · If the Social Security population estimates and projections for the 130-year period of 1950-2080 are correct, then the greatest demographic "burden"--when the number of dependents (children plus the elderly) relative to the working-age population--is already in the past, having reached its height in 1965 when there were 94.7 dependents per 100 persons of working age. · The total number of dependents per 100 persons of working age has generally been decreasing since 1965 but is expected to reverse course beginning around year 2013. The change coincides with the retirement of some early cohorts of the baby-boom generation. · The composition of the dependency ratio is changing. The number of children per worker has been falling since 1965; most of the anticipated increase in the dependency ratio in the coming decades reflects a growing proportion of older persons (ages 65 and older). These age-specific trends in the age dependency ratios are not, however, off-setting in terms of their federal budget implications. Programs carried out by the federal government focus much more heavily on assisting the elderly population. Based on estimates from the Congressional Budget Office (CBO), the federal government spent a little over one-third of its budget--about $615 billion--on transfer payments and services (with the Social Security and Medicare entitlement programs being the biggest expenditures) for people age 65 and older in FY2000. Federal spending on children was about $148 billion, or $175 billion if payments to the children's parents were included.12 State and local governments have historically provided substantial support for families with children through spending on elementary and secondary education and other programs. Nevertheless, because federal spending dwarfs state and local figures, total government spending for the average person 65 years or older is still much greater than for the average child.13 · Age dependency ratios, while providing a glimpse at how the age structure of the population is changing, are nonetheless crude measures that do not take into consideration whether persons of working age are actually working and supporting the economy, nor whether dependents are truly economically dependent and receiving transfers from working-age persons. Furthermore, as noted by Friedland and Summer,14 "society's future is not determined solely by demographic changes. Focusing on the anticipated growth in population by age 12 Congressional Budget Office (CBO), Federal Spending on the Elderly and Children, July 2000, at http://www.cbo.gov, accessed June 17, 2005. (Hereafter cited as CBO, Federal Spending on the Elderly and Children.) See also: (1) CRS Report RS22008, Federal Spending for Older Americans, by April Grady and William Klunk (hereafter cited as CRS Report RS22008); and (2) C. Eugene Steuerle, "The Incredible Shrinking Budget for Working Families and Children," National Budget Issues, no. 1, Dec. 2003. 13 CBO, Federal Spending on the Elderly and Children. Note, however, that the increase in the ratio of older persons to people under 65 also has important implications for state budgets because of the growth in Medicaid spending as a share of total state government expenditures. Medicaid is the largest public source of spending on long-term care (LTC), and this will strain state budgets because a substantial contributor to the rise in the old-age dependency ratio will be due to increases in the number of people 85 and older who are disproportionately large consumers of LTC services. 14 Robert B. Friedland and Laura Summer, Demography Is Not Destiny, Revisited, Commonwealth Fund Publication 789 (New York, Mar. 2005), p. v. (Hereafter cited as Friedland and Summer, Demography is Not Destiny.) ¢ ¢ ¢ group is just too simplistic an approach. Rather, the future is shaped by the choices made--or not made--individually and collectively, bounded by the limits in resources and, in particular, knowledge. Knowledge is at the heart of gains in productivity, economic growth, and the advances in medical care, agriculture, communication, transportation, and the environment." ¢ The ratios reported here are CRS compilations based on estimates and projections from the SSA.15 The information for years 1950 (the earliest available year) to 2005 are estimates that are based on actual data16; the information for years 2004-2080 are projections, which rely upon assumptions about future mortality, fertility, and immigration patterns. To address the uncertainty that is inherent in all population projections, SSA constructs several sets of projections which are based on different combinations of assumptions. The data represented here uses the intermediate set of projections in the Trustees Report, which represents the Board's best estimate of the future course of the population. The Trustees produce two additional sets of projections, the "high-cost" and "low-cost" scenarios, which use differing assumptions about the future courses of fertility, mortality, and immigration. Figure 2 highlights the possible variation in the total dependency ratio through 2080 under these three different scenarios. While SSA's best guess of the total dependency ratio in year 2080 is 86.1 dependents per 100 persons of working age, the range of possible values varies from 83.1 to 94.5. 15 Trustees Report, 2006. 16 Note that the data for years 2003, 2004, and 2005 are preliminary. ¢ ¢ ¢ 2 erugiF fo steS eerhT rednU ,0802-5002 ,oitaR ycnednepeD detcejorP latoT. noitargimmI dna ,ytilitreF ,ytilatroM erutuF fo snoitpmussA eht fo tropeR launnA 6002 :ni selbat lacitsitats no desab sisylana )SRC( ecivreS hcraeseR lanoissergnoC :ecruoS ,6002 ,1 yaM ,sdnuF tsurT ecnarusnI ytilibasiD dna ecnarusnI srovivruS dna egA-dlO laredeF eht fo seetsurT fo draoB .6002 ,02 .tcO dessecca ,fdp.60rt/60RT/RT/TCAO/vog.ass.www//:ptth ta elbaliava Figure 3 presents statistics on the number of older persons supported per 100 persons of working age in 2002 in 10 countries.17 Eight of the countries are members of the G8, a consultative grouping of leading industrial democracies: Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States. In addition, China and India, the two most populous countries globally, are included to highlight that population aging is occurring even in nations that are less industrialized and have "younger" current age structures. 17 CRS compilation based on U.S. Census Bureau, International Population Reports WP/02, Global Population Profile, 2002 (Washington, DC: GPO, 2004). ¢ ¢ ¢ 3 erugiF detceleS ni egA gnikroW fo snosreP 001 rep stnednepeD redlO fo rebmuN . 5202 dna 2002 ,seirtnuoC lanoitanretnI ,uaeruB susneC .S.U no desab noitalipmoc )SRC( ecivreS hcraeseR lanoissergnoC :ecruoS .)4002 ,OPG :CD ,notgnihsaW( 2002 ,eliforP noitalupoP labolG ,20/PW stropeR noitalupoP tsehgih yb detros era seirtnuoC .R.A.S uacaM dna ,.R.A.S gnoK gnoH ,nawiaT edulcxe anihC rof serugiF :setoN 001 rep redlo dna 56 ega snosrep fo rebmun eht etaler setamitsE .2002 ni oitar rekrow-ot-tnedneped ega-dlo ni ecrof krow eht otni yrtne ta ega ro tnemeriter fo ega lausu eht fo sseldrager )46-02( ega gnikrow fo snosrep .seirtnuoc eseht fo hcae Of the 10 countries included in the comparison, Italy ranked first, with Japan close behind, in terms of the number of older persons being supported per 100 workers in 2002--29.6 and 29.5, respectively. Among the G8 countries, Canada and the United States were tied for last place at 20.818 older persons per 100 persons of working age--indicating that the Canadian and American "burdens" are less than those of the other G8 countries.19 Not coincidentally, the proportions of their population aged 65 and older--13% and 12% respectively in 2000--are also the lowest of the G8 nations. In India, with its young age structure, there were only 9.0 older persons per 100 persons of working age. The total age dependency ratio (not shown in graph) is, however, greatest for India among the 10 countries--there are 90.5 dependents (mostly children) per 100 persons of working age. Figure 3 also highlights that population aging is a global phenomena--the number of older dependents per 100 persons of working age is projected to increase through 2025 in all 10 of the countries considered here. The projected increase in Japan, where the ratio will reach 51.1, is especially notable. Italy and Germany will each have over 40 older dependents per 100 persons of 18 Note that the Census Bureau's estimate of the old-age dependency ratio for the United States in 2002 was 20.8, which is slightly higher than Social Security's estimate of 20.6 for the same year (as seen in Figure 1 and Table A-1). 19 Note, however, that the total dependency ratio is greater in the United States than in Canada since Americans are supporting a higher number of children. ¢ ¢ ¢ working age. Increases are also expected in both China and India. In fact, the old-age dependency ratio in 2025 in China20 will exceed the level observed in the United States, Canada, and Russia today. Figure 4 shows the number of child dependents per 100 persons of working ages. India had the highest child dependency ratio in 2002 at 81.5. Of the G8 countries considered, the United States was the leader, largely reflecting the fact that the American fertility rate, while currently hovering around the replacement level,21 has not fallen as far as in the other G8 nations. For instance, the total fertility rate in Italy was 1.2 in 2002 compared to 2.1 in the United States in the same year. The estimates for India and China, and to a lesser extent the Russian Federation, are also affected by differential (higher) rates of infant and childhood mortality. 20 China's age structure is quickly transforming from that of a "young" population to that of an older one, as measured by the mean age of the population and proportions in the relevant young and old age groups. The speed of population aging in China is also significantly faster than had been observed in the G8 countries. In China, it is expected that 26 years (from 2000-2026) will be required for the percent of the population age 65 or older to rise from 7% to 14%. In comparison, 115 years (from 1855-1980) were required in France; 69 years in the United States (1944-2013); and 65 years (1944-2009) in Canada. See Kevin Kinsella and David R. Phillips, "Global Aging: The Challenge of Success," Population Bulletin, vol. 60, no. 1, Mar. 2005. 21 The level of fertility and mortality in a population at which women will replace themselves in a generation, in the absence of migration. It corresponds to a total fertility rate (the average number of children a cohort of women would have by the end of their childbearing years) in the range of 2.04 to 2.10. ¢ ¢ ¢ 4 erugiF detceleS ni egA gnikroW fo snosreP 001 rep stnednepeD dlihC fo rebmuN . 5202 dna 2002 ,seirtnuoC lanoitanretnI ,uaeruB susneC .S.U no desab noitalipmoc )SRC( ecivreS hcraeseR lanoissergnoC ehT :ecruoS .)4002 ,OPG :CD ,notgnihsaW( 2002 ,eliforP noitalupoP labolG ,20/PW stropeR noitalupoP tsehgih yb detros era seirtnuoC .R.A.S uacaM dna ,.R.A.S gnoK gnoH ,nawiaT edulcxe anihC rof serugiF :setoN 001 rep sraey 02 rednu ega nerdlihc fo rebmun eht etaler setamitsE .2002 ni oitar rekrow-ot-tnedneped dlihc eseht fo hcae ni ecrof krow eht otni yrtne ta ega lausu eht fo sseldrager )46-02( ega gnikrow fo snosrep .seirtnuoc Unlike the increasing old-age dependency ratios highlighted in Figure 3, the child dependency ratios are projected to fall through 2025 in most of the countries considered. The notable exception is the United States where it is projected that there will be 47.4 child dependents in 2025, as there had been in 2002. In summary, population aging, which results primarily from declining fertility rates and increasing survival, is a global phenomenon. Today, the United States is the "youngest" of the industrialized G8 nations. While the proportion of the U.S. population that is aged 65 and older will continue to increase, aging in the United States is still projected to be considerably slower than in any of the other industrialized countries.22 In addition to reflecting the fact that the American fertility rate, which is currently hovering around the replacement level, has not fallen (nor is it projected to) as far as the other G8 nations, the "U.S. is leading the way in adapting to the changing balance ... by encouraging immigration."23 The SSA estimates that net legal 22 Friedland and Summer, Demography is Not Destiny. 23 David E. Bloom, A. K. Nandakumar, and Manjiri Bhawalkar, The Demography of Aging in Japan and in the United (continued...) ¢ ¢ ¢ immigration and net other immigration were about 675,000 persons and 400,000 persons, respectively, in 2005. For its future projections, SSA assumes the total level of net immigration (legal and other, combined) under the intermediate projection to be 1 million persons annually in the 2010s, 950,000 annually in the 2020s, and 900,000 annually in 2030 and each year thereafter through 2080.24 While these comparatively high levels of immigration differentiate the United States from the other G8 nations, they have a small effect on the median age of U.S. residents and on the total dependency ratio as immigrants are mostly young people who have children (and also higher fertility rates than the U.S.-born population). Immigration nudges the worker-elderly ratio a little higher, meaning that there are more people of working age per person age 65 or older. The more dramatic effect, however, is at the younger ages. Immigration after 2000 is projected to add about 15 million more children under age 18 than there would be without any post-2000 immigration. Continued immigration will lower the worker-child ratio and increase the child component of the dependency ratio.25 ¢ ¢ Most Western industrialized nations, including the United States, have systems in place providing significant social security benefits, and virtually all of these plans originated with pay-as-you-go (paygo) or quasi-paygo funding schemes.26 In the United States, payroll or self-employment tax contributions by current workers (and their employers) are transferred to current beneficiaries. The majority of Social Security taxes paid by today's workers are not put into a special account to pay for their future benefits. Rather, they are used to pay benefits for persons receiving benefits today, just as the future benefits for today's workers will be paid by future generations of workers. In general, a low ratio of retirees to workers (the system's old age dependency ratio) and a high rate of productivity and real wages would permit a paygo social security system with high benefits or low contributions.27 (...continued) States, in Gail B. Hedges, ed., "Aging and Health: Environment, Work and Behavior", Harvard Printing and Publications, 2003. 24 Trustees Report, 2006. 25 Philip Martin and Elizabeth Midgley, "Immigration: Shaping and Reshaping America," Population Bulletin, vol. 58, no. 2, June 2003. 26 Robert L. Brown, "Paygo Funding Stability and Intergenerational Equity," Transactions of Society of Actuaries, vol. 47, 1995. (Hereafter cited as Brown, Paygo Funding Stability.) Note that significant modifications have been made to the original designs of the systems over time. 27 Estelle James, Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth, World Bank Policy Research Report, 1994. (Hereafter cited as James, Averting the Old Age Crisis.) ¢ ¢ ¢ ¢ ¢ ¢ Advantages of government-sponsored paygo schemes relative to fully funded systems include the following:28 · The entire working population can be covered relatively easily. · The benefits can serve as social insurance against the (income) risks associated with old-age and disability. · Benefits can be immediately vested and are fully portable, an important feature for a mobile work force. · Administrative costs are usually very low. Given these advantages, paygo systems looked very attractive in the immediate post-World War II years. Projections of labor force growth, coupled with forecasts of real wage growth, implied a potential total annual return near 5% for a fully mature paygo system. In contrast, the common view of a funded system involved investing contributions in government securities with a return of 1% or less. In the aftermath of the Great Depression, the market for equities seemed far too risky, and many countries lacked private bond markets. Furthermore, most countries instituting a new pension system were unwilling to delay initial benefit payments for several decades, as would have been required under a funded system. There was a desire to address the immediate problem of high poverty among the elderly, and most countries provided benefits to an older generation of workers which had not contributed fully to the system.29 Also, to many at that time, a high rate of population growth (and subsequent work force growth) seemed inevitable, in which case pay-as-you-go seemed a good way to finance an old age pension program.30 ¢ The current outlook is much different. Birth rates have fallen considerably while the life expectancy at the older ages has increased significantly, resulting in less favorable old-age dependency ratios (as shown in Figures 1 and 2). While the old-age dependency ratio had already been increasing since 1950, the upcoming retirement of the baby-boom generation will accelerate the rate at which it grows. However, even after the youngest of the baby-boom generation has passed away, the number of older dependents per 100 persons of working age will still continue to increase, albeit at a slower pace than will be experienced during the years in which the baby boomers retire. Concurrent with these demographic trends, the Congressional Budget Office (CBO) projects that federal spending for Social Security, adjusted for inflation, will rise substantially--from $483 28 See, for instance, Brown, Paygo Funding Stability. 29 Barry Bosworth and Gary Burtless, "Pension Reform and Saving" (Washington, DC: Brookings Institution). Paper prepared for a conference of the International Forum of the Collaboration Projects, held in Tokyo, Japan, Feb. 17-19, 2003. (Hereafter cited as Bosworth, Pension Reform and Saving.). 30 James, Averting the Old Age Crisis. ¢ ¢ ¢ billion in 2003 to $2.5 trillion in 2075.31 The projected rise in Social Security spending is due, in part, to the demographics of an aging society; CBO estimates that approximately 55% of the higher spending is due to the expected increase in the number of beneficiaries, as the number of new claimants grows and as life expectancy rises. The remaining 45% of the rise is due to a projected increase in the real value of Social Security benefit checks. Specifically, they note that, under rules put into effect in 1979, benefits of newly eligible recipients are based on a formula and earnings records that are adjusted for wage growth. Those adjustments, referred to as wage indexing, are designed to keep the ratio of initial benefits to pre-retirement earnings--that is, replacement rates--approximately the same from one generation of new recipients to the next. Wages tend to rise along with productivity in the economy, at a faster pace than prices and, over the long run, a system pegged to wage growth will gradually afford greater purchasing power.32 As both CBO and the Government Accountability Office (GAO) are warning, current spending policies are likely to be unsustainable.33 The policy implication is that, unless there are large offsetting productivity gains in the U.S. economy, contribution rates by current workers (e.g., tax rates) must markedly rise or benefit levels must fall under Social Security's paygo system. Alternatively, the structure of the underlying paygo system could be modified such that part or all of the scheme is fully funded. This, however, raises the same issues that caused most countries to originally select paygo systems: reduction of (investment) risk and the need to pay benefits for the current generation of beneficiaries. 31 Congressional Budget Office, The Future Growth of Social Security: It's Not Just Society's Aging, An Issue Summary from CBO, no. 9, July 2003, at http://www.cbo.gov. 32 Ibid. See also CRS Report RL32900, Indexing Social Security Benefits: The Effects of Price and Wage Indexes, by Patrick Purcell, Laura Haltzel, and Neela K. Ranade. 33 See CRS Report RS22008, Federal Spending for Older Americans. 3.91 5.85 8.77 350,52 057,921 488,57 786,032 8791 2.91 2.06 4.97 754,42 663,721 007,67 325,822 7791 1.91 0.26 1.18 178,32 450,521 675,77 105,622 6791 0.91 8.36 8.28 503,32 758,221 734,87 995,422 5791 9.81 6.56 5.48 767,22 247,021 742,97 657,222 4791 8.81 4.76 1.68 672,22 817,811 169,97 559,022 3791 7.81 9.86 6.78 918,12 487,611 205,08 501,912 2791 6.81 3.07 9.88 173,12 319,411 557,08 930,712 1791 5.81 3.17 8.98 329,02 851,311 486,08 567,412 0791 4.81 3.27 7.09 994,02 774,111 175,08 745,212 9691 3.81 5.37 8.19 321,02 557,901 616,08 494,012 8691 3.81 8.47 1.39 667,91 239,701 327,08 124,802 7691 3.81 1.67 4.49 224,91 611,601 347,08 182,602 6691 2.81 5.67 7.49 190,91 597,401 231,08 810,402 5691 1.81 1.67 2.49 647,81 697,301 799,87 935,102 4691 9.71 7.57 6.39 704,81 307,201 667,77 678,891 3691 8.71 3.57 0.39 260,81 675,101 444,67 280,691 2691 6.71 4.47 0.29 976,71 416,001 858,47 151,391 1691 3.71 2.37 5.09 872,71 818,99 670,37 271,091 0691 0.71 9.17 9.88 158,61 921,99 652,17 632,781 9591 6.61 4.07 0.78 393,61 835,89 473,96 503,481 8591 3.61 8.86 0.58 139,51 299,79 104,76 423,181 7591 0.61 3.76 2.38 094,51 570,79 313,56 878,771 6591 7.51 8.56 4.18 370,51 671,69 162,36 015,471 5591 3.51 2.46 5.97 236,41 656,59 893,16 686,171 4591 9.41 6.26 5.77 861,41 902,59 006,95 779,861 3591 5.41 1.16 6.57 917,31 727,49 329,75 963,661 2591 1.41 0.06 1.47 782,31 201,49 914,65 808,361 1591 8.31 7.85 5.27 118,21 148,29 664,45 811,061 0591 )+56 )91-0( stnednepeD )+56 )46-02( )91-0( latoT raeY -56( snosreP nerdlihC llA -56( snosreP egA nerdlihC redlO redlO gnikroW )ega gnikrow fo snosrep 001 rep )sdnasuoht ni( stnedneped fo rebmun( noitalupoP oitaR ycnednepeD )ega gnikrow fo snosrep 001 rep stnedneped fo rebmuN( 0802-0591 ,setatS detinU ,soitaR ycnednepeD egA .1-A elbaT ¡ ¢ ¢ ¢ 2.12 3.44 5.56 046,04 726,191 959,48 622,713 1102 9.02 7.44 6.56 267,93 380,091 598,48 047,413 0102 8.02 1.54 8.56 011,93 613,881 838,48 462,213 9002 6.02 4.54 0.66 244,83 956,681 796,48 897,903 8002 4.02 6.54 1.66 687,73 280,581 274,48 043,703 7002 3.02 9.54 3.66 762,73 463,381 812,48 948,403 6002 3.02 3.64 6.66 209,63 754,181 369,38 223,203 5002 3.02 6.64 0.76 394,63 744,971 507,38 546,992 4002 4.02 1.74 5.76 052,63 913,771 234,38 100,792 3002 6.02 5.74 1.86 710,63 430,571 271,38 322,492 2002 7.02 0.84 7.86 137,53 316,271 609,28 052,192 1002 8.02 5.84 3.96 324,53 572,071 185,28 972,882 0002 9.02 9.84 8.96 671,53 941,861 291,28 715,582 9991 1.12 2.94 3.07 720,53 161,661 017,18 898,282 8991 2.12 4.94 6.07 858,43 762,461 321,18 842,082 7991 3.12 5.94 8.07 026,43 854,261 334,08 115,772 6991 3.12 5.94 8.07 223,43 448,061 126,97 787,472 5991 3.12 4.94 7.07 179,33 073,951 047,87 180,272 4991 3.12 2.94 5.07 195,33 139,751 157,77 372,962 3991 2.12 0.94 2.07 031,33 225,651 096,67 243,662 2991 0.12 9.84 9.96 785,23 630,551 947,57 273,362 1991 9.02 9.84 8.96 920,23 863,351 060,57 754,062 0991 8.02 2.94 9.96 384,13 185,151 545,47 906,752 9891 7.02 5.94 1.07 459,03 048,941 990,47 398,452 8891 5.02 7.94 3.07 314,03 791,841 307,37 313,252 7891 3.02 1.05 4.07 508,92 306,641 393,37 108,942 6891 1.02 5.05 6.07 761,92 759,441 112,37 533,742 5891 0.02 2.15 2.17 875,82 690,341 942,37 329,442 4891 9.91 1.25 0.27 020,82 820,141 394,37 145,242 3891 7.91 1.35 9.27 524,72 198,831 887,37 401,042 2891 6.91 2.45 8.37 808,62 396,631 621,47 726,732 1891 5.91 5.55 0.57 732,62 824,431 865,47 332,532 0891 4.91 9.65 3.67 356,52 711,231 161,57 139,232 9791 )+56 )91-0( stnednepeD )+56 )46-02( )91-0( latoT raeY -56( snosreP nerdlihC llA -56( snosreP egA nerdlihC redlO redlO gnikroW )ega gnikrow fo snosrep 001 rep )sdnasuoht ni( stnedneped fo rebmun( noitalupoP oitaR ycnednepeD ¢ ¢ ¢ 3.73 2.44 4.18 274,87 746,012 200,39 121,283 4402 2.73 2.44 4.18 550,87 779,902 318,29 548,083 3402 2.73 3.44 4.18 437,77 081,902 926,29 345,973 2402 2.73 4.44 6.18 554,77 113,802 944,29 512,873 1402 2.73 5.44 7.18 271,77 614,702 862,29 658,673 0402 2.73 6.44 8.18 958,67 025,602 280,29 164,573 9302 2.73 7.44 9.18 145,67 495,502 098,19 520,473 8302 2.73 8.44 0.28 231,67 127,402 496,19 745,273 7302 0.73 8.44 8.18 205,57 820,402 494,19 420,173 6302 7.63 9.44 5.18 546,47 815,302 882,19 154,963 5302 3.63 9.44 2.18 517,37 730,302 670,19 828,763 4302 0.63 9.44 9.08 468,27 134,202 558,09 051,663 3302 7.53 9.44 6.08 540,27 847,102 526,09 814,463 2302 4.53 9.44 3.08 821,17 021,102 583,09 336,263 1302 9.43 9.44 8.97 710,07 446,002 331,09 497,063 0302 3.43 9.44 1.97 886,86 743,002 368,98 898,853 9202 6.33 8.44 3.87 332,76 931,002 475,98 649,653 8202 9.23 6.44 5.77 507,56 569,991 662,98 639,453 7202 1.23 5.44 6.67 280,46 748,991 249,88 178,253 6202 2.13 3.44 5.57 343,26 987,991 795,88 927,053 5202 3.03 2.44 5.47 545,06 637,991 332,88 415,843 4202 5.92 1.44 6.37 777,85 574,991 300,88 552,643 3202 6.82 1.44 8.27 610,75 950,991 388,78 859,343 2202 8.72 2.44 0.27 842,55 246,891 637,78 626,143 1202 0.72 2.44 2.17 015,35 312,891 745,78 072,933 0202 2.62 1.44 3.07 918,15 628,791 742,78 298,633 9102 4.52 0.44 4.96 332,05 504,791 958,68 794,433 8102 8.42 9.34 7.86 647,84 478,691 664,68 680,233 7102 1.42 9.34 0.86 113,74 542,691 601,68 266,923 6102 5.32 9.34 4.76 019,54 694,591 697,58 202,723 5102 9.22 9.34 8.66 655,44 926,491 525,58 017,423 4102 3.22 0.44 4.66 152,34 186,391 382,58 512,223 3102 7.12 1.44 9.56 898,14 337,291 780,58 817,913 2102 )+56 )91-0( stnednepeD )+56 )46-02( )91-0( latoT raeY -56( snosreP nerdlihC llA -56( snosreP egA nerdlihC redlO redlO gnikroW )ega gnikrow fo snosrep 001 rep )sdnasuoht ni( stnedneped fo rebmun( noitalupoP oitaR ycnednepeD ¢ ¢ ¢ 8.14 0.44 7.58 424,59 094,822 084,001 493,424 7702 7.14 0.44 6.58 539,49 029,722 852,001 311,324 6702 5.14 0.44 6.58 154,49 733,722 930,001 728,124 5702 4.14 0.44 5.58 479,39 047,622 128,99 535,024 4702 3.14 0.44 4.58 305,39 031,622 606,99 932,914 3702 3.14 1.44 3.58 630,39 905,522 293,99 739,714 2702 2.14 1.44 3.58 075,29 978,422 081,99 926,614 1702 1.14 1.44 2.58 301,29 442,422 869,89 513,514 0702 0.14 2.44 1.58 336,19 806,322 657,89 799,314 9602 8.04 2.44 0.58 330,19 890,322 445,89 576,214 8602 6.04 2.44 7.48 423,09 696,222 033,89 053,114 7602 3.04 1.44 5.48 336,98 472,222 511,89 220,014 6602 1.04 1.44 2.48 089,88 618,122 798,79 396,804 5602 0.04 1.44 1.48 924,88 752,122 676,79 263,704 4602 9.93 2.44 0.48 569,78 716,022 254,79 430,604 3602 8.93 2.44 0.48 615,78 969,912 522,79 017,404 2602 7.93 2.44 9.38 940,78 843,912 499,69 193,304 1602 6.93 2.44 8.38 345,68 777,812 067,69 080,204 0602 4.93 2.44 6.38 800,68 742,812 225,69 777,004 9502 3.93 2.44 5.38 564,58 737,712 382,69 584,993 8502 1.93 2.44 3.38 998,48 562,712 040,69 402,893 7502 9.83 2.44 0.38 392,48 548,612 697,59 439,693 6502 6.83 1.44 8.28 156,38 474,612 055,59 576,593 5502 4.83 1.44 5.28 520,38 790,612 303,59 524,493 4502 3.83 1.44 3.28 594,28 436,512 750,59 681,393 3502 2.83 1.44 2.28 950,28 580,512 018,49 459,193 2502 1.83 1.44 1.28 656,18 115,412 365,49 037,093 1502 0.83 1.44 1.28 752,18 539,312 813,49 015,983 0502 9.73 1.44 0.28 288,08 433,312 770,49 392,883 9402 9.73 1.44 0.28 225,08 907,212 348,39 470,783 8402 8.73 1.44 9.18 301,08 031,212 916,39 258,583 7402 6.73 1.44 7.18 985,97 826,112 404,39 126,483 6402 4.73 1.44 6.18 410,97 661,112 991,39 973,383 5402 )+56 )91-0( stnednepeD )+56 )46-02( )91-0( latoT raeY -56( snosreP nerdlihC llA -56( snosreP egA nerdlihC redlO redlO gnikroW )ega gnikrow fo snosrep 001 rep )sdnasuoht ni( stnedneped fo rebmun( noitalupoP oitaR ycnednepeD ¢ ¢ ¢ .srekrow 001 rep stnedneped redlo 8.31 erew ereht ,0591 nI .)rotanimoned( srekrow fo rebmun eht ot )rotaremun( stnedneped fo rebmun eht etaler hcihw soitar ycnedneped dewohs txet eht fo ydob niam eht ni 1 erugiF .redlo dna 56 ega snosrep 001 yreve troppus ot srekrow 527 erew ereht ,0591 ni ,elpmaxe roF .)rotanimoned( stnedneped fo rebmun eht ot )rotaremun( srekrow fo rebmun eht setaler erugif sihT :setoN .6002 ,02 .tcO dessecca ,fdp.60rt/60RT/RT/TCAO/vog.ass.www//:ptth ta elbaliava ,6002 ,1 yaM ,sdnuF tsurT ecnarusnI ytilibasiD dna ecnarusnI srovivruS dna egA-dlO laredeF eht fo seetsurT fo draoB eht fo tropeR launnA 6002 :ni selbat lacitsitats no desab sisylana )SRC( ecivreS hcraeseR lanoissergnoC :ecruoS 0802-0591 ,setatS detinU ,stnednepeD 001 reP sno sreP egA gnikroW fo rebmuN .1-A erugiF .6002 ,02 .tcO dessecca ,fdp.60rt /60RT/RT/TCAO/vog.ass.www//:ptth ta elbaliava ,6002 ,1 yaM ,sdnuF tsurT ecnarusnI ytilibasiD dna ecnarusnI srovivruS dna egA-dlO laredeF eht fo seetsurT fo draoB eht fo tropeR launnA 6002 :ni selbat lacitsitats no desab sisylana )SRC( ecivreS hcraeseR lanoissergnoC :ecruoS 1.24 0.44 1.68 819,69 731,032 951,101 412,824 0802 0.24 0.44 0.68 514,69 795,922 039,001 249,624 9702 9.14 0.44 8.58 719,59 840,922 407,001 966,524 8702 )+56 )91-0( stnednepeD )+56 )46-02( )91-0( latoT raeY -56( snosreP nerdlihC llA -56( snosreP egA nerdlihC redlO redlO gnikroW )ega gnikrow fo snosrep 001 rep )sdnasuoht ni( stnedneped fo rebmun( noitalupoP oitaR ycnednepeD ¢ ¢ ¢ ¢ ¢ ¢ Laura B. Shrestha Specialist in Domestic Social Policy lshrestha@crs.loc.gov, 7-7046 ------------------------------------------------------------------------------ For other versions of this document, see http://wikileaks.org/wiki/CRS-RL32981