Yes…you read the title right. A baby boom can save the Social Security trust fund.
3 Assumptions That Could Change Everything
On an annual basis, the Social Security trustees release their report detailing the solvency of the Old Age Survivors Disability Insurance program, also called the OASDI or simply…the social security trust fund.
You’ve probably heard about the OASDI being empty by the year 2034, and that there will only be enough tax revenue to cover 75% of the benefit payments.
As we are not in 2034 yet, there are certain assumptions that are being made by the trustees when building these forecasts. These assumptions fit into three broad categories:
- Demographic Assumptions;
- Economic Assumptions; and
- Disability Assumptions.
Today I want to narrow down to the demographic assumptions. Within this category there are an additional three sub categories: Death rates (or mortality rates), Immigration rates and… fertility rates. That last one is what I want to focus on today.
Quick Question: I want to hear from you in the comments below. Of these three demographic assumptions, which do you think have the most impact on the future of Social Security? Is it death rates, immigration or fertility rates? I look forward to reading your comments.
So why does fertility have an impact on the future of Social Security? Well…that’s pretty simple. More babies turns into more working adults which turns into more payroll tax being paid in. That’s how the system stays afloat.
The projection of the Social Security trust fund running dry by 2034 is based on each woman having 2 children. In the report, they’ve also examined what would happen if each woman had 1.8 children and 2.2 children. These changes didn’t have much of an impact on the long term solvency of the trust fund. But what would happen if we went through another baby boom?
I’m not a demographer, but birthrate data is easily accessible from the Centers for Disease Control’s website. What you’ll immediately see is that historically, birth rates in the United States have fluctuated widely.
The total fertility rate decreased from 3.31 children per woman at the end of the first World War to 2.15 during the Great Depression. The total fertility rate rose to 3.68 in 1957 and then fell to 1.74 by 1976.
After that it rose above to around 2.00 children per woman and was close to that up until a few years ago. Since then, it’s been dropping. In 2017, it hit 1.76 children per woman.
I have a lot of respect for the people who study population science. It can get complex. When birthrates are too low, countries worry that in the long term they may not have enough workers to keep productivity up and the economy moving along. Meanwhile, a birthrate that’s too high can be a drag on resources. The “replacement” fertility rate of 2.1 — enough to renew the population — is typically viewed as the optimal level for stability.
But, as history shows us, baby booms can be triggered by lots of events. So back to the question that triggered this article…what would happen if birthrates went up sharply?
We can do a rough measurement of this using data provided by the American Academy of Actuaries. In their summary of the trustees report, they measure the sensitivity of various fertility rates. If we assume this ratio remains constant, we can tell that if we went back through another baby boom like the one in the 1950s, the Social Security trust fund wouldn’t have any issues remaining solvent.
Will there be a baby boom in the future?
Do I think that’s going to happen? I have no idea. The Social Security Trustees don’t think it will happen. They believe that changes in our society that have occurred during the past 50 years is responsible for reducing these birth rates. Things such as increased availability and use of birth control, increased female participation in the labor force, increased postponement of marriage as well as postponement of childbearing among young women, and a few other factors.
However, countries over the world are beginning to take notice of their declining birth rates and some are even starting to incentivize having more than 2 children. I don’t know if the US will ever do this, but assuming birthrates are forever stuck around 2% is ignoring history.
If nothing else, I hope I have helped to illustrate how many factors impact Social Security. While long range planning is necessary, it is possible that one of the trustee’s assumptions will be badly wrong and the trust fund will last a little longer than anticipated.
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I’d like to thank Dr. Brandon Renfro at brandonrenfro.com for his assistance in the research on this topic.
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