Yahoo’s short “Just Explain It” video on Social Security seriously misrepresented the financial situation of the program. The segment misled viewers on both the magnitude of the demographic changes affecting the programs finances and also the impact of the projected shortfall.
The piece told viewers:
“Back in 1950, there were 7.11 workers per retiree. That number today is 4.5 and in 30 years, economists estimate that number will be 2.6 workers for every retiree.”
The Social Security trustees report actually puts the ratio of covered workers to retirees at 16.5 to 1 in 1950 and just 2.8 in 2012. It is projected to be 2.2 in 30 years.
The difference is important because most of the drop in the ratio of workers to retirees has already occurred. Astute readers will note that on average workers and retirees both enjoy considerably higher living standards today than in 1950 in spite of the sharp decline in the ratio of workers to retirees.
The reason this happened is that the impact of productivity growth swamps in raising living standards swamps any negative impact of demographic changes in lowering living standards. As the chart below shows, the gains from even modest rates of productivity growth vastly exceed the impact of the projected decline in the ratio of workers to retirees.
Source: Social Security Administration and author's calculations.
It is true that most workers have seen little benefit from the gains in productivity growth over the last three decades. This has been due to the huge upward redistribution of income over this period. If this pattern continues then there will be grounds for worrying about the living standards of most of our children and grandchildren. However, this highlights the need to address the policies that have increased inequality and not to waste time worrying about demographic issues.
Finally the piece badly misrepresents the meaning of the shortfall in the Social Security trust fund projected for 2033. This projected shortfall does not mean that the program would pay zero benefits, it means that it could only pay about 75 percent of scheduled benefits (closer to 80 percent in the Congressional Budget Office projections).
Because benefits are projected to rise through time, this would still be a larger benefit than most retirees receive today. More importantly, it is almost inconceivable that in a country where beneficiaries comprise 25 percent more of the voting population than at present that Congress would sit back and do nothing when Social Security could no longer pay full benefits.
If we actually reached this point, most likely there would be some emergency commission established to work out a solution as happened when the program faced a shortfall in 1982. No one ended up missing a check. Since the size of the projected shortfall is smaller relative to the size of the economy than the annual costs of the Iraq and Afghanistan wars, it should not be that difficult to figure out how to come up with the money.
In short, Yahoo has given a late Halloween scare story. It has not explained Social Security to its readers at all.