Caring for an Aging Population

One of the major challenges that Americans face in this new century is caring for an increasingly elderly population. As Table 30.7 shows, the percentage of individuals over 65 years of age increased dramatically between 1960 and 2010. This trend has created severe strains for the Social Security system and doubts about its future. In 2010 there were about 5 people between the ages 18 and 64 (and therefore in their prime working years) for every person 65 or older. But that ratio is expected to fall as baby boomers retire and as medical science extends the life expectancy at age 65 and beyond. Social Security will be a major source of income for those seniors, and a crucial source for those who lack alternative sources of income. The question is whether Social Security as it is now structured will provide adequate funds. The history of Social Security can provide some clues to what the future will hold.

Initially, Social Security was an insurance system based on the principle that an interest-earning fund should be built up from the premiums collected from individuals and that the fund should be adequate to meet future obligations. Taxes were collected beginning in 1937, but no benefits were paid until 1942 to accumulate a reserve. The pressure to increase benefits, especially given the threat of more radical plans for redistributing income to the elderly, became too great to resist. In 1939, legislation was passed that converted Social Security into a pay-as-you-go system, with beneficiaries being supported by those currently paying into the system.

In the ensuing years, Social Security benefits increased rapidly for several reasons: the population aged, more workers were covered, and benefits were indexed to the price level. Inevitably, the tax rate had to be increased: from 2 percent in 1937 to 10.4 percent today (including both the amount paid directly by the employee and the employer’s contribution). The maximum tax payment rose from $60 in 1937 (about $750 in today’s money) to $11,450 in 2012. From a legal point of view, 60 percent of the tax is paid by the employer, and 40 percent is paid by the employee. Economists recognize, however, that the economic locus of the tax may be different from the legal locus, and many economists believe that in reality workers pay most of the tax, because the employer contribution is passed on in the form of lower wages.

What would happen if the Social Security system should run short of funds? We can take some comfort from history because once before the Social Security system came

TABLE 30.7 THE ELDERLY POPULATION, I960-2010

Source: 1960-1990: Statistical Abstract of the United States, 2000, Table 12; 2000- 2012: Statistical Abstract of the United States, 2012, Table 34.

Perilously close to bankruptcy. On April 1, 1982, the system’s trustees reported that “Social Security will be unable to pay retirees’ and survivors’ benefits on time starting in July 1983 unless Congress takes corrective action.” Congressman Claude Pepper of Florida, a leading spokesperson for the elderly and chair of the House Select Committee on Aging, said that the trustees’ report “confirms my belief that the poor performance of the economy is robbing the Social Security trust funds.” For the 17th straight year, the combined old-age and disability trust funds had paid out more than they took in, and soon they would be depleted. However, a compromise that saved the system was reached. In 1981 a Presidential commission, chaired by Alan Greenspan and usually referred to simply as the Greenspan Commission, was appointed to examine the finances of Social Security and make recommendations. And legislation based on the commission’s findings (and a lot of last-minute wheeling and dealing) which provided for benefit reductions and tax increases rescued the system. Nevertheless, concerns about the future of Social Security continue. A major question for the future is how we will pay for government transfer programs such as Social Security, Medicare, Medicaid, and veterans benefits, other government transfer programs, many of which do not have adequate sources of finance in place. In principle we should be making plans now for meeting these future obligations. If history is any guide, however, it will take a crisis, like the 1982 trustees report, to goad the Congress and the executive branch to action. But history also suggests that in the end politicians will compromise and agree on benefit cuts and tax increases to fund the programs.