The Social Security "crisis" crew has often repeated the
meme of a
future shortfall as fewer workers support a retired population. This viral idea,
the ratio of workers, is a fallacious argument that Bush and Co. state often.
This meme came not out of sound economic theory, but rather from a PR firm. The
fact is worker productivity gains make the "number of workers" rhetoric
irrelevant. Worker productivity, GDP, Public Debt levels and tax base are far
more relevant. This quote from the Concise Encyclopedia of Economics explains
the issue quite well:
While factors of production like land will always be scarce, the potential
for increasing total factor productivity is limitless. At least half, if not
more, of the growth in labor productivity in the post-World War II period has
been due not to the use of added capital, but to making better use of these
inputs. The United States produced 65 percent more in 1981 than in 1948 from
the same quantity of labor and capital resources.
In 1910, 30% of our country's population was involved in food production. With
a steady increase in technology and techniques we now have only 3% of our population
working in agriculture. In other words fewer workers are supporting more people.
When retail moved from manual pricing and manual registers to POS (point of
sale/barcodes) based systems, the productivity gains were tremendous. When
retailers realized that that same data used for pricing maintenance could be
harvested for replenishment purposes, another giant leap in productivity was
made. This gain came not only in direct productivity gains (fewer workers required
to maintain a manual replenishment system), but also in tangential areas as
JIT (just in time) replenishment systems were established. This new approach
meant goods were handled less because inventory went from the factory dock
to the shopper's bags with far less wait time. There was little or no stockroom
hold time either at the store or the distribution center. Also this approach
reduced the amount of capital that was tied up in non productive inventory
(inventory sitting off the sales floor). This newly freed capital then becomes
factored into the industry’s productive output. In other words, still
more productive output was achieved with fewer workers.
The one human trait that is universal across all cultures and time periods
is the fundamental desire to find a way to improve our productive output. We
continuously seek improvements, from the mundane everyday tasks (like bill
paying) to mass agricultural production. Hunters developed techniques to work
as teams and take down the Wooly Mammoth because one Mammoth kill equaled hundreds
of small game kills.
The ratio of past workers to current workers is as immaterial as how many
slices you cut your apple pie into. If you eat half the pie in one sitting
does it really matter if that half was cut in three slices as opposed to six?
The question “how many calories were in the amount consumed” has
a more relevant answer than the number of slices.
When Bush ran for Congress in the early 70's he was outspoken in his call
for privatizing Social Security. He stated that the system would go broke by
1980. When FDR set up Social Security, he brought in the nation’s top
actuaries to assemble the program. They knew there would be ebb and flow in
the number of workers versus beneficiaries. They knew that the average life
span would change, etc. The system was set up to be continuously adjusted to
meet future demands. In fact, we have made several minor corrections over the
years that, thanks to the multiplier effect, kept us on course. There are solutions
to future payouts. Among those that have been floated: Raise the cap at which
workers pay into Social Security (set at the first $90,000 of income back in
the early 80's and never adjusted since, despite inflation and average wage
growth). Adjust the indexing. Advance the retirement age by 60 days a year
until the retirement age has been raised to 66. This plus a minor increase
in payroll tax for SS would insure that there would be funding for our retirement
benefits. Also, most importantly, place a firewall between Social Security
receipts and the greedy hands of politicians who view it as money to spend.
Additionally, Social Security is not a retirement plan but rather an insurance
plan. Not only does it insure that the elderly are not living in cardboard
boxes and eating cat food, it also provides basic life insurance and disability
insurance. When I was growing up I had friends whose parents had died. They
received Social Security payments until they reached 18. This enabled their
uncle to be able to afford to take them in and care for them. I knew of two
families this affected when I was growing up.
Now, that aside, there is reason for concern in the current trend of a slowdown
in worker productivity gains in the US. While we have dominated in the past
50 years, we are losing gains. Inadequate capital for R&D, a poor savings
rate and its effect on capital markets, and no significant increase in the
average quality of education of our work force in several years, has likely
resulted in the productivity loss.
The same “ratio of workers” fallacy has been applied to pension
concerns as well. Regarding pensions, the same observation of worker productivity
apply. The exception facing pensions is that of a company shrinking such as
large corporation sliding from a $36 billion (sales) company into a $4 billion
company. There again, the number of workers is irrelevant, the sales and profit
and the productive output of current workers are what really matters. Greater
concern should be placed on corporate mangers that too often see the pension
fund as their (corporate) funds and not the employees’. The defaulting
on pensions, the mismanagement of pension funds is really a question of checks
and balances, of regulation and accountability as well as market forces exerted
on a corporation. The ratio of workers to retirees is a sideshow compared to
other factors.