US Social Security Under Low Fertility

Abstract

Focusing on existing social security programs in the US this article discusses ways to minimize their negative societal impacts and to cope with emerging below replacement fertility. Inasmuch as the very survival of social security systems depends on the levels of reproduction this article considers probable adjustments of social security under conditions of below-replacement fertility. Social security systems create distortions in the labor supply and savings rate that reduce the potential size of a countrys gross national product. Faced with this plus other taxes on income to support various government programs the worker perceives his diminished discretionary after-tax income as inadequate to support a family; hence more wives enter the labor force resulting in even lower birth rates. As the retirement age and birth rate fall there are fewer workers to support older nonworkers. As a result taxes are usually increased. Benefit growth is rarely restrained. Currently over 20% of the US budget pays for social security benefits. The US Old-Age and Survivors Insurance (OASI) can provide 1 to several benefits per worker taxed. The social security systems actuaries in making their 75-year demographic projections may be underestimating future life expectancy and overestimating the future total fertility rate of women in the US. If their demographic assumptions are wrong either the taxes will have to be increasd further or the level of benefits constrained or both. The sensitivity of the social security system to overestimates of the fertility rate is even greater than to underestimates of longevity at old ages. Immigration may partially offset the low birth rates of US natives. Despite the way it favors nonworking and divorced women the US social security system has not offset the secular trend of increasing female employment. The US government must now decide 1) whether to attempt to influence the birth rate by changing the economic balance between the rewards for having and not having a child and 2) whether to reduce the current transfer of income from young to old.