• Large Future Deficits
• Demographics
• Future Costs
• Macroeconomic Problems
• Slow Economic Growth
• Generational Accounting
• Increased Interest on Debt
• Capital Flight
• Economic Solutions
• Social Security
• Medicare
• Discretionary Spending
• Taxes
• Political Limitations
• Ideological Difference
• Partisan Politics
• Public Awareness
• Deficit Politics
• Entitlement Spending
• Policy Recommendations
• Complete Recommendation


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Demographics

America is aging. Lower birth rates and higher life expectancy rates are shifting the average age of the population upward. Consequently, there will be more retirees for every worker in American Society, thus increasing the relative cost of each retiree.  Because of the current pay-as-you-go system, these demographics will significantly contribute to America’s worsening deficit.

Between the year 2010 and 2030, the ratio between the working age population and the retiree age population will shift dramatically as both the baby boom generation, born between 1946 and 1964, retires and the life expectancy for that generation increases. (Click on all graphs to see larger versions.)  Even though part of the 1983 Social Security Act increased the retirement age from 65 to 67, it is clear that average life expectancy increases at a faster rate than the increase in the retirement age. This creates a proportionally larger segment of the population for the working population to support. This problem is dynamically shown in the Period of Life Expectancies at Birth graph.[i]

When Social Security, the first entitlement program, began, there were 16 workers per retiree. By 1960 that ratio had been reduced to 5.1 workers per retiree. The number has consistently fallen and is projected to level off in the year 2030 with approximately 2.1 workers per retiree.[ii]

It is this changing population ratio that will cause much of the nation’s future deficits. The entitlement programs have an implicit promise to pay out benefits to retirees. However, the system is based on a pay as you go model.  This model means that instead of benefits being paid by earlier earnings of non-working recipients, they are paid for by the current working population.  Thus, this system of financing raises cost per retiree as the population ages.  Because the ratio of payees to recipients is lowered, it becomes impossible to for the government to fulfill its promises with current projected revenues.

Currently, the payroll tax, which contributes to the Social Security Trust Fund portion of the US budget, is running a surplus due to favorable demographics. This surplus makes the deficit appear smaller and has been used to pay for other government expenses. Thus, the government sold bonds (IOUs) to the Social Security Trust Fund.  Around the year 2017, revenues will fall below costs, thus requiring the Federal Government to payout some of the Trust Fund’s bonds. Assuming that the current system remains in effect and immigration policies are not changed, [iii]in the year 2041, all of the Trust Fund’s bonds will be sold and the government will only be able to fund approximately 73% of the promises owed out of the trust fund revenues