Jeremiah sees red whenever he reads about the dependency ratio. China must engineer a baby boom, so that they will have enough young workers to support a billion retirees. Europe must admit hordes of migrants, in hopes they will pay into the retirement fund. Economists talk about the dependency ratio as if it were an iron law of demographics, and it’s not. It is merely the artifact of a badly designed retirement program.
Despite the term “trust,” the Social Security system contains nothing that remotely resembles the common law trust. It is merely a system of taxation and appropriation sprinkled with trust terms – John Attarian
The dependency ratio only matters because Social Security, and other systems around the world, are passthru systems. Workers paying into it today are paying directly to those who have already retired. These retirees, in turn, have spent their working lives supporting someone else. The system needs at least two workers for every retiree, which means an ever-expanding workforce.
This is an absolutely insane proposition on which to base a retirement system. If the workforce actually doubled every generation, the population boom would overwhelm the planet. More likely, some generation soon will decide to stuff it. That will leave Jeremiah, having paid into the system all his life, holding the bag. It is literally a Ponzi scheme.
The correct design, of course, is to accumulate the contributions over time, so that the cohort drawing benefits in any given year is roughly the same cohort that paid in. This decouples the system from the vagaries of demographics. Whatever boom or bust in the workforce today, will be matched to the later demands of their retirement.
This design would also allow the fund to invest in high yielding projects over long timeframes. A national retirement program should be a big winner, not the bankrupt loser we have. For comparison, look at Singapore’s Temasek, the Ontario Teachers’ Pension Plan, or Berkshire Hathaway.
Far from being “worthless IOUs,” the investments held by the trust funds are backed by the full faith and credit of the U. S. Government – Social Security Administration
The solution for China, just starting down the slope with a 1:3 ratio, is to implement an accumulating system instead of a passthru one, and not plan on a workforce of 3 billion. For our Western welfare states, the old system must be phased out – so as not to strand Jeremiah – and replaced with a new one.
This means America will need political leaders who can handle a trillion dollar fund, and resist the temptation to pillage it for “emergencies.” Our track record is not promising.