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300 Million, Social Security, and Solvency

1 October 2006     Volume 8 / Number 38

Dear Colleagues:

The problem with America's population size of 300 million is that it's not big enough (to keep us solvent).

Steven W. Mosher President

300 Million, Social Security, and Solvency

As America's population reaches 300 million next month, we must wonder if our nation's infrastructure can bear such a population size.  Can she survive 300 million and corresponding increases indefinitely?  It's a good question, because 300 million isn't enough.

As America's economic and demographic infrastructure currently stands, her population is too small.  The baby boomers and subsequent generations have had too few children, meaning there will not be a sufficient number of workers in the future to support the many retirees our nation will host over the next few decades.  This necessitates free-market reforms of our Social Security, Medicare, and Medicaid systems along the lines suggested by expert and long-time activist Peter Ferrara (see below), and without which disastrous, birthrate-lowering Big Government policies will be enacted.

Different experts come up with somewhat different numbers, but no one disputes the long negative trend in the worker-retiree ratio--or the huge hit that is coming.  According to the House Budget Committee, the worker-to-retiree ratio was 5 to 1 in 1960.  In 2002, it was 3 to 1, a 40% drop.  By 2050, it will be 2 to 1, a further 33% drop.  And at the same time, Americans' life expectancies will increase and health care costs will likely rise tremendously, as they have been in the past few decades. No wonder the Social Security system is bankrupt.

"Because the baby boomers have not yet started to retire in force and accordingly the ratio of retirees to workers is still relatively low, we are in the midst of a demographic lull," former Federal Reserve Chairman Alan Greenspan told Congress about four years ago.  "But short of an outsized acceleration of productivity to well beyond the average pace of the past seven years or a major expansion of immigration, the aging of the population now in train will end this state of relative budget tranquility in about a decade's time."  Six years left.

The United States' birthrate is only 2.0 children per woman, slightly below replacement level.  The boom in children produced by the generation that won World War II was replaced by a baby bust from the generation of the 1960s.  The bust continues and will for the foreseeable future. Even the USA's current high rate of immigration will not stop the precipitous drop in the number of workers per retiree.  According to the United Nations, the proportion of the American population 65 or over will go from 12.3% today to 20.6% by 2050.  Those 80 or over will go from 3.6% to 7.3%.

Social Security faces an $11-trillion deficit over the long term. Medicare faces one of $68 trillion.

Fortunately, there are solutions.  The best one is for people to have a lot of children.  That would not only save Social Security and Medicare, but rescue the economy in general from a dearth of workers.  It would also reduce the pressure for high immigration levels, with their accompanying problems.  Unfortunately, a dramatic increase in the American birthrate isn?t likely forthcoming, so to rescue our most beloved entitlement programs, our Washington elites want to pursue a very different strategy--one likely to depress America's birthrate even further until she is in a European-style death spiral.  (Most European nations have very low birthrates that spell doom for their societies.)

Since the end of World War II, federal spending as a proportion of America's Gross Domestic Product (GDP) has hovered around 20%.  Yet, if free-market solutions to the problems of Social Security and Medicare are not implemented, federal spending will rise to about 40% of GDP by 2050 requiring a huge tax increase on working families.  That, in turn, will prompt Americans to have even fewer children than they have now, since financial concerns are often the No. 1 reason people choose to have fewer children.

Some, even some "conservative" Washington types, want to strike a compromise that will result in the feds swallowing "only" 30% of GDP. That would mean a "mere" 50% hike in our federal taxes.

"This disastrous trend toward Big Government not only can be stopped, but actually can be reversed through reforms that would garner broad popular support, if structured and explained correctly," wrote Ferrara in a September 6 "Issue Brief" for the Institute for Policy Innovation. "Indeed, these reforms together would actually substantially reduce federal spending as a percent of GDP."

Ferrara proposes common-sense solutions to rescue entitlements without raising taxes.  These proposals would also give individual American families more control over more of their own money:

* Personal Accounts for Social Security.  The money could be invested in the stock market and earn a solid return, instead of sitting in a government account earning minimal interest.  Children could inherit any leftover amounts rather than the government keeping them for itself.

* Personal Accounts for Medicare and Medicaid.  Again, investments in markets will multiply Americans? tax money much faster than the government can.  In addition, individuals would have incentives to keep their health care costs down since they could keep unused funds for themselves.  At the rate costs are currently increasing, the alternative is to have government bureaucrats decide what health care you will receive a la HillaryCare.

* Pro-Growth Tax Reform.  Replacing our ludicrously inefficient tax code with a flat tax or national sales tax would increase economic growth in this nation enormously over time.  But care would have to be taken to avoid hiking taxes on the large families currently benefiting from the child tax credit.

A copy of Ferrara's article can be found in the "Publications" section of the IPI website (www.ipi.org).

America's population problem needs solving.  We can hope her population will increase faster from now on, and that government policies will not get in the way.

Joseph A. D'Agostino is Vice President for Communications at the Population Research Institute.

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