Jubak's Journal
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Our only hope: retiring later
To save Social Security, we need people to work longer. But instead of raising the benefits age, we should encourage them to stick around by making work more rewarding.
By Jim Jubak
Republicans Charles Grassley in the Senate and Bill Thomas in the House of Representatives have thrown in the towel for the summer: All efforts to reform Social Security are off until September at the soonest.
And I say, thank goodness! All of today's proposals to solve what President Bush has termed "the Social Security crisis" are doomed to failure.
Congress should use the time off to study my plan for solving the crisis. It has one advantage over anything I've heard from anyone else: It'll actually work.
All existing plans, except mine, are doomed because they're based on the idea that we can save and invest our way out of a global demographic crisis. Because, you see, the crisis isn't a crisis in the Social Security system at all. It's just one part of a global crisis in productivity. The whole world is getting old pretty much all at once, so saving more and investing at higher returns won't do the trick.
My solution is based on common sense and my observations of what people actually do in retirement: They work. It's based on a belief that we'd fix the so-called crisis if we could just get more productive work out of older workers, by improving their jobs so they'd voluntarily stay on at work, or by giving them resources and support to start post-retirement careers.
Worrisome math
We like to think of it as "our" Social Security problem. Because the U.S. population is aging rapidly, the number of workers paying into Social Security is shrinking relative to the number of retirees who want to draw money out. And this ratio is about to shift big time when the huge baby boom generation starts to retire.
In 1985, according to the Social Security Administration, in the United States there was one person 65 and older to every five people aged 20 to 64, a "dependency ratio" of 20%. After staying close to that through 2010 (it hits 21% that year), the ratio takes off, jumping by nearly 50% to 31% in 2025. In 15 short years, from 2010 to 2025, we'll have gone from a population in which we have one person over 65 for every five people aged 25 to 64, to a society with one person over 65 for every three between 25 and 64.
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No wonder Social Security -- a program that collects taxes from current workers and pays them out as benefits to current retirees must, by many projections, dip into its surplus in 2020 to pay benefits at current levels. The surplus could vanish by 2040, 2050 or 2075, depending on which politician is doing the figuring and what brand of snake oil he or she is pushing.
But "our" Social Security story is merely one chapter in the global book on aging populations and it's by no means the scariest. By 2040, 26% of the U.S. population will be at least 60 years old, up from 16.3% in 2000, according to the Center for Strategic & International Studies. But by that same year at least 45% of the populations of Japan, Spain and Italy will be 60 or older. Even China will have a higher percentage of over-60s than the United States, with 28% of its population past that age.
Suffering the consequences
This global aging has two important consequences.
First, it'll dry up the global pool of savings that's providing capital for corporations around the world and to fund the U.S. trade and budget deficits. This has already started. Households save less as they age. The peak savings years are from 30-50 and the median age of the population in Japan, whose residents once were among the world's best savers, is now in the middle of that peak range. In Japan there are now more elderly households than savings households and the savings rate there has dropped to 5% from 25% in 1975. The experts project that it'll be below 1% in 20 years.
More than 70% of the world's financial assets come from just five countries: the United States, Japan, Germany, Italy and Britain. (China, with its high current savings of 20%, according to some figures, is just too small an economy to earn its way into that club even though the U.S. savings rate is so much lower at just 2%.) Populations in all these countries are shifting from the saving to the consuming years.
With more countries withdrawing more money from the global savings pool than they're putting in, the next two decades will see a gradual shift from today's surplus of global savings (and low interest rates) to a time when there's intense competition for those savings (and higher interest rates.)
Second, the aging of the population and the combination of relatively scarcer and more expensive capital will drive down productivity. Productivity growth in the United States since 1995 has averaged almost 3.5%.
A troublesome dynamic
But for the next decade, McKinsey Global Institute projects that U.S. productivity will average just 2.6%. And since increases in an economy's size are a function of population growth, which also slows as a population ages, plus productivity growth, the rate of growth in the U.S. economy will also slow just when we need a bigger economy to generate more wages and higher Social Security tax receipts.
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