The authors are with the Coping with the Demographic Challenge: Office of Retirement Policy, Office of Policy, Social Security Fewer Children and Living Longer Administration. by Gayle L. Reznik, Dave Shoffner, and David A. Weaver Summary retirement benefits of low lifetime earners. Still other options would seek to Due to demographic changes, the U.S. raise additional revenue for the system. Social Security system will face financial Since individuals will be living longer in challenges in the near future. Declining retirement, many policymakers believe it fertility rates and increasing life expect- is important to encourage older workers ancies are causing the U.S. population to to delay retirement so that they can age. Today 12 percent of the total maintain a quality standard of living population is aged 65 or older, but by throughout their retirement. One proposal 2080, it will be 23 percent. At the same to encourage continued work would be to time, the working-age population is increase the early eligibility age for shrinking from 60 percent today to a Social Security benefits from age 62 to projected 54 percent in 2080. Conse- age 65. This could possibly hurt individu- quently, the Social Security system is als who need to retire from physically experiencing a declining worker-to- demanding jobs but would ensure that beneficiary ratio, which will fall from 3.3 people receive higher benefit amounts in 2005 to 2.1 in 2040 (the year in which once they were able to fully retire. the Social Security trust fund is projected Other proposals that could promote to be exhausted). This presents a signifi- more work at older ages include expand- cant challenge to policymakers. ing phased retirement options and One policy option that could help keep reforming pension and defined contribu- the Social Security system solvent is to tion systems to create incentives to work reduce retirement benefits, either by and save. raising the normal retirement age or through life expectancy indexing, to reflect the fact that people are living Introduction longer. However, these reductions in Americans are living longer and are benefits have the potential to harm having fewer children. Together these economically vulnerable retirees. Other factors result in the aging of the U.S. options, such as progressive price population and a subsequent strain on the indexing proposals, explicitly protect the Social Security system. This demo- graphic challenge has been recognized Social Security Bulletin • Vol. 66 • No. 4 • 2005/2006 37 by policy analysts as well as policymakers. President population will have more than doubled as a percentage Bush, in his 2005 State of the Union Address (White of the total population in just over 100 years. At the same House 2005), highlighted this problem, saying: time, the working-age population will have shrunk, from 60 percent in 2005 to 54 percent in 2080. In today’s world, people are living longer and, These demographic changes can be traced to declining therefore, drawing benefits longer. And those fertility rates as well as increasing life expectancies. At benefits are scheduled to rise dramatically over the start of the baby boom (1946), the average number of the next few decades. And instead of sixteen children born to a woman in her lifetime was 2.86. By the workers paying in for every beneficiary, right end of the baby boom (1964), that number had increased now it’s only about three workers. And over the to 3.17. The fertility rate was much lower in the next few decades that number will fall to just two postboomer years, although the rate has increased since workers per beneficiary. With each passing year, 1980 and is projected to decline slightly in the coming fewer workers are paying ever-higher benefits to decades (Chart 1). an ever-larger number of retirees. Unlike the fertility trends, which exhibit large swings This article describes policy implications and some over particular periods, life expectancy exhibits a steady potential policy solutions to this demographic challenge. It increase (Chart 2). In 1960, a 65-year-old individual could first provides context for the policy discussion by examin- expect to live another 15.5 years. By 2000, life expect- ing fertility, mortality, work, and retirement patterns in the ancy at age 65 had risen by 2.5 years. Projections United States and then discusses different policy options. indicate further gains of similar magnitude by 2040, at which point 65-year-olds can expect to live an additional 20.4 years. Background Immigration also plays a role in the age structure of As in many countries, the population in the United States the population. Compared with earlier decades, net is graying. Table 1 shows how the elderly population has immigration has increased in recent years (Table 2). increased over time and how it is projected to grow in the Because immigrants tend to be younger and have higher future. In 1950, 8 percent of the total population was fertility rates than the general population, immigration aged 65 or older. That share was 12 percent in 2005 and mitigates the aging of the population. Without immigration is projected to reach 23 percent by 2080. The elderly the aging trend would be more pronounced. Table 1. U.S. population, by age, selected years 1950–2080 Population (thousands) Percentage Year All ages Under 20 20–64 65 or older 65 or older Historical 1950 160,118 54,466 92,841 12,811 8 1970 214,765 80,684 113,158 20,923 10 1990 260,458 75,060 153,368 32,029 12 2005 302,323 83,963 181,457 36,902 12 Projected a 2020 339,269 87,547 198,213 53,510 16 2040 376,856 92,268 207,416 77,172 20 2060 402,079 96,760 218,777 86,543 22 2080 428,214 101,159 230,137 96,918 23 SOURCES: Board of Trustees (2006, Table V.A2) and authors' calculations. NOTE: For the purpose of this table, the U.S. population is the Social Security area population, comprising residents of the 50 states and the District of Columbia (adjusted for net census undercount); civilian residents of Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Northern Mariana Islands; federal civilian employees and persons in the armed forces abroad and their dependents; crew members of merchant vessels; and all other U.S. citizens abroad. a. Projected using the intermediate assumptions in the 2006 annual report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds. 38 Social Security Bulletin • Vol. 66 • No. 4 • 2005/2006 Chart 1. Fertility rates, selected years 1946–2030 Number of children 3.5 3.17 Historical Projected a 3.0 2.86 2.43 2.5 2.07 2.06 2.03 2.01 2.00 2.0 1.82 1.5 1.0 0.5 0 1946 1964 1970 1980 1990 2000 2010 2020 2030 Ye a r SOURCE: Board of Trustees (2006, Table V.A1). a. Projected using the intermediate assumptions in the 2006 annual report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds. Chart 2. Unisex cohort life expectancy at age 65, selected years 1960–2060 Years of increased life expectancy 25 Historical Projected a 21.4 20.4 19.2 20 18.0 18.3 16.9 15.5 15 10 5 0 1960 1980 2000 2005 2020 2040 2060 Ye a r SOURCE: Bell and Miller (2004). a. Projected using the intermediate assumptions in the 2004 annual report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds. Social Security Bulletin • Vol. 66 • No. 4 • 2005/2006 39 insurance program, but the projected future decline is due Table 2. to the aging of the U.S. population. This ratio is of Net immigration, selected years and total for fundamental importance to the long-run fiscal health of 1960–2030 the U.S. Social Security program. With currently sched- Year Legal Other uled tax rates and benefits, the system needs a worker- Historical to-beneficiary ratio of about 2.8 to function at a pay-as-you-go level (meaning that tax revenue approxi- 1960 201,276 -- mately equals benefit payments). The Social Security 1970 278,928 -- 1980 410,348 375,000 Trustees project that the ratio will slip below this level by 1990 501,065 550,000 2020 and will fall to only 2.1 workers per beneficiary by 2000 677,579 550,000 2040 (Chart 3). The current Social Security program is 2005 675,000 400,000 not a strict pay-as-you-go program because a sizable Projected a trust fund exists. Projections indicate, however, that the trust fund will be exhausted in 2040, and the low worker- 2010 600,000 400,000 2020 600,000 350,000 to-beneficiary ratio will present a significant challenge to 2030 600,000 300,000 policymakers. Total, 1960–2030 35,034,621 21,250,000 Policy Options for Social Security Solvency SOURCE: Board of Trustees (2006, Table V.A1). NOTE: -- = not available before 1980. In the United States, a number of analysts believe that a. Projected using the intermediate assumptions in the 2006 annual retirement benefits should be adjusted to reflect the fact report of the Board of Trustees of the Federal Old-Age and that people are living longer—a concept referred to as Survivors Insurance and Disability Insurance Trust Funds. longevity indexing. Edward M. Gramlich, chairman of the 1994–1996 Advisory Council on Social Security and a former Federal Reserve Governor, argues that a “‘slight Challenges Facing the Social Security Program cut in the growth of future benefits’ is a fair way to deal Rising life expectancy is a positive development in that it with the fact that retirees are likely to live longer—and gives people more years to enjoy life, but adjustments collect more in benefits—than in 1935, when the retire- and adaptations are needed so that people will have the ment age was set at 65” (Bethell 2005).