The U.S. Fertility Rate. The country's fertility rate is the number of children women of childbearing age will have over their lifetime. To replace the population, that rate must be 2.1. In other words, to keep the population at its current size each woman must have an average of two children to replace one adult male and one adult female. (The reason for the .1 is to make up for children who do not live to adulthood.) The U.S. fertility rate currently is about 1.9, and it recently has been as low as 1.8.¹¹ If it remains below the replacement rate, the implications for the future of Social Security are dramatic. As Table I shows, the Social Security Administration's intermediate projection is for the fertility rate to continue to be 1.9 in 2020. The pessimistic projection is 1.6. Only the optimistic projection exceeds the replacement rate, at 2.2. A country with a fertility rate below 2.1 eventually will see its population shrink. Along the way, the number of old people relative to young will grow continuously. That means the tax burden on the young will grow indefinitely.  

According to the pessimistic forecast, the U.S. population will peak before today's college students retire and then will begin to decline. [See Figure III.] By this projection, 100 years from now the population of the U.S. will be only slightly larger than it is today.¹² But there will be one major difference. Whereas today most people are young, a century from now one out of three people will be old.¹³  

Couldn't women choose to have more children in the future? That is possible. But don't count on it. Since 1960 the fertility rate has fallen substantially throughout the world. Virtually every developed country is now below the replacement rate (Ireland is the exception).¹⁴ The average fertility rate for Europe is only 1.5. [See Figure IV.] In Italy the rate is 1.2, the lowest in the world. In Japan it's 1.5. There are reasons to think this is not just a fad. The secular decline in fertility stretches back a hundred years.¹⁵ Demographers do not expect a reversal of the trend.  

Even less-developed countries have seen the fertility rate plunge from 6.0 to 3.1 in the past 30 years. And some demographers now seriously propose that the world's population may reach a peak of about 7.7 billion around 2040 - the current population is believed to be about 5.8 billion - and then begin a long-term decline.¹⁶ Were this to occur, it would make pay-as-you-go retirement systems in virtually all countries unsustainable.  

Life Expectancy. The year Ida Fuller received her first Social Security check, life expectancy at birth was 61.4 years for men and 65.7 years for women. The average male could expect to pay taxes over his entire work life and die 3.5 years before he qualified for benefits.¹⁷ The average female could expect to collect benefits for only a few months. Reaching the retirement age of 65 was viewed as an adverse contingency - something like becoming disabled. Supporting the few people who would be so afflicted seemed easily affordable.  

Today, of course, things are different. Life expectancy at birth is 72.6 years for men and 79.3 years for women.¹⁸ And every demographer expects years of life in old age to grow. Based on intermediate projections, when today's college students reach retirement age a male at birth will expect to live as many as 77.2 years and a female as many as 82.7.¹⁹ A number of analysts believe life expectancy may reach 90 or 95 by that time.  

Medical Science. As people get older, they consume more health care. Although the elderly today constitute only 12 percent of the population, they account for about one-third of all health care spending. By the time today's college students reach their mid-50s, one out of five people will be old and they will consume as much as two-thirds of our health care resources.²⁰ Even with existing technology, health care for the elderly will be expensive. How much more expensive will new techniques be?  

Fifty years ago, no one could have imagined the medical procedures that are commonplace today. Similarly, we cannot predict what medical science will achieve over the next 50 years. However, we do have two advantages over forecasters in the past. First, we know that modern society has given medical researchers a blank check. Implicitly we have told them: invent it and show us that it improves health care, and we will buy it. As a result, we have virtually guaranteed that the medical research and development industry will work hard at making new discoveries that will cost us more money. Second, we have a fairly good idea of the direction in which medical science will progress.  

For example, it is virtually inevitable that scientists will produce a complete mapping of the genetic code. The only question is when. Because many life-threatening diseases are related to our genetic resistance to them, an understanding of individual genetic makeup opens the door to the prevention of disease by artificial intervention. For example, Americans are constantly exposed to carcinogens. They occur naturally in the food we eat, the water we drink and the air we breathe. But some people, partly because of their genetic endowment, resist exposure better than others.²¹ Once we understand the mechanism of susceptibility or resistance (which probably will not require a complete understanding of the genetic code), we will be able to sharply reduce and perhaps eliminate death from cancer.  

The greatest uncertainty is what the achievements of modern science will do to the future financial burden of income maintenance and health care for the elderly. For example, heart disease, cancer and strokes currently account for 65 percent of all deaths among the elderly.²² Moreover, these three diseases are responsible for 40 percent of all hospital days and 50 percent of all days spent in bed.²³ If we could eliminate all three diseases, we would also eliminate three major categories of health care spending. But it is not clear that our total financial burden would go down, for the elderly would live longer and collect more Social Security checks. They would then eventually die of some other - possibly expensive-to-treat - disease. One of the ironies of this issue is that what's good for people is bad for the Social Security system, and vice versa.  

Most countries with pay-as-you-go retirement systems do not have trust funds, and the United States would probably be wise to follow their example. The trust funds not only mislead people - who think their taxes are actually being invested in something - but also distract attention from the real funding problem. Every payroll tax check sent to Washington is written to the U.S. Treasury. Every Social Security benefit check is written on the U.S. Treasury. The trust funds do not collect taxes, nor do they pay benefits. Technically, they hold interest-bearing bonds that represent the accounting surplus of payroll taxes collected minus benefits paid. But the Social Security trustees cannot sell the bonds on Wall Street or to a foreign investor. They can only return them to the Treasury. In this sense, the bonds are nothing more than IOUs the government has written to itself.  

On paper, the Social Security trust funds have enough IOUs to "pay" Social Security benefits for about 17 months on any given day; the Medicare trust fund can "pay" benefits for about one year. In reality, they cannot pay anything. Every asset of the trust funds is a liability of the Treasury. For the Treasury to write a check, it must first tax or borrow.  

If the trust funds were simply abolished, real economic activity would be unaffected. No private bondholders would suffer. The government would not be relieved of any of its existing obligations or commitments. Economist Robert Eisner has suggested that we abolish the trust funds or, with the stroke of a pen, double or triple the number of IOUs they hold.²⁴ Either option would allow us to dispense with artificial crises and get on to the real problem: how is the Treasury going to pay the government's bills?  

For most of its history, Social Security has been viewed as an antipoverty program. It was the crown jewel of the Roosevelt-era liberal welfare state. And Social Security checks still shield many elderly people from poverty. Sixty-six percent of elderly beneficiaries rely on Social Security for more than half their income.²⁵ Thirty percent get 90 percent or more of their income from Social Security.²⁶  

Regressive Taxes. However, Social Security is much less progressive than first impressions suggest. Take the FICA payroll tax, which is now a larger burden than the income tax for 76 percent of taxpayers.²⁷ The payroll tax is highly regressive - taking a larger percentage bite out of the pay of lower-income workers - for two reasons. First, although the 2.9 percent Medicare tax has no cap, the remaining 12.4 percent tax (for retirement and disabilities) applies only to the first $65,400 of wages in 1997. While low- and moderate-wage earners pay 12.4 percent of their income, those earning $1 million pay less than 1 percent. Second, the tax applies only to wage income, not capital income (rent, interest, dividends, profit), penalizing people who receive almost all their income as wages.  

Regressive Benefits. On the benefit side, the system is skewed in the other direction. Benefits as a percent of preretirement earnings are lower for those who earned more during their working years. For retirees in 1996, Social Security could be expected to replace about 42.4 percent of preretirement income of the average-wage worker, 57.1 percent of that of the low-wage worker and 25.6 percent of that of the high-wage worker. But any system that makes benefits conditional on reaching old age has a built-in bias against the poor. Low-income people have higher mortality rates and shorter life expectancies. Moreover, in absolute dollars high-income earners get more. Social Security paid a rich retiree $15,912 in 1997, while a low-income retiree got less than half that amount ($6,255). Social Security pays the highest benefits to those who least need government help.  

Effects on Minorities. Because blacks die earlier than whites, they can expect to collect fewer Social Security benefits.²⁸ For example, as Figure V shows, the life expectancy of a black male is currently 64.9 years. This means that a black male at birth can expect to pay Social Security taxes for his entire work life, but collect less than nine months of benefits. Prospects are better for black females, but their life expectancy of 73.9 years is less than the 79.6 years for a white female. ²⁹ Further, a smaller proportion of blacks go to college, so blacks as a group begin their working lives earlier and thus start paying payroll taxes sooner than whites. But they receive no additional benefits for working longer because Social Security benefits are based on the last 35 years of work history.³⁰  

Transfers from the Poor to the Rich. There are other facts to consider. On the average, the elderly have considerably more wealth than do those under age 65. For example, as Figure VI shows, elderly married-couple households had a median net worth of $129,790 in 1993, compared to $127,752 for those ages 55-64, $61,874 for those ages 35-54 and $12,941 for those under age 35. ³¹ Single elderly householders also had higher net worths than younger ones. As an income transfer program, Social Security takes from those who have less and gives to those who have more.  

Private Alternatives. If people had not paid Social Security taxes, they could have invested the same dollars in stocks and bonds. According to one calculation, someone earning the maximum taxable wage could have had more than three times the income paid by Social Security if their Social Security taxes were invested in the stock market. Investments in the bond market would have produced a 73 percent higher monthly pension check. Even low-income retirees (who are supposed to benefit from Social Security's "progressive" benefit formula) could have had almost 2 1/2 times the retirement income had they invested their taxes in stocks.³² [See Figure VII.]  

Wages represent a higher proportion of the poor worker's income, so the payroll tax, which applies only to wages, takes a higher percentage of that worker's total income. Thus that worker is further disadvantaged by having to "invest" such a high proportion of income in Social Security taxes rather than private investments with a higher return.³³  
 

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