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short essays and reports on the economic issues of the day
2007 ■ Number 22

Can Social Security Survive the Baby Boomers?
Craig P. Aubuchon and David C. Wheelock
n 2010, the first of the Baby Boom generation will reach
2002, the fertility rate had fallen to 2.0. This decline implies
age 65. Many will choose to begin what they hope will be
that fewer young persons will enter the labor force to support
a long and financially secure retirement funded in part
the growing elderly population.
by Social Security. Social Security, however, has a looming
Clearly, the looming Social Security funding crisis largely
fiscal problem. Social Security payments to current recipients
reflects changing U.S. demographics. The aging baby boom
are funded mainly by taxes levied on current workers. As more
generation, increased adult life expectancy, and declining ferand more baby boomers retire, the number of persons receivtility will rapidly increase the number of retired persons drawing Social Security benefits will increase rapidly relative to the
ing benefits relative to persons paying taxes to fund those
number of persons paying taxes to fund those benefits. Accordbenefits. Possible solutions to the problem include policies to
ing to the Trustees of the Social Security and Medicare Trust
(i) slow the growth in the number of retired persons per worker,
Funds, by 2017 Social Security benefit payments will exceed
perhaps by larger and more rapid increases in the age at which
payroll tax revenues and by 2041 all trust fund assets likely
persons become eligible for benefits; (ii) otherwise reduce
will be exhausted.1
promised benefits; (iii) encourage more immigration of young
workers; and/or (iv) substantially raise taxes on current workers.
The Social Security System’s revenue shortfall mainly
A more radical proposal would replace all or part of the existreflects a rising elderly dependency ratio: that is, the number
ing system with a system of private retirement accounts. Unfor of elderly persons (65+ years) relative to the number of worktunately, the funding crisis cannot be solved without cost, no
ing-age persons (20 to 64 years). As shown in the chart, in
matter what route is taken. ■
1950 there were some 14 persons age 65 and older for every
100 persons between the ages of 20 and 64. By 2000, there
1 Annual Report of the Social Security and Medicare Boards of Trustees for 2007;
were 20; and, as more of the baby boom generation reaches
age 65, the ratio will rise to 35 by 2030.
Although the coming stampede of baby
Dependency Ratio
Life Expectancy (years) at Age 65
boomers will cause the dependency ratio to
increase sharply after 2010, rising adult life
Dependency Ratio per 100 Workers
expectancy has been a major reason why the
Life Expectancy at Age 65
dependency ratio has risen and will continue
to rise. The life expectancy of the typical 6517
year-old man has risen over the years: In 1940,
he could expect to live another 12.7 years; by
2005, he could expect to live another 17.1
years; and demographers expect that, by
2030, he could expect to live another 18.7
years. Although the age at which persons are
eligible for full Social Security benefits—long
fixed at 65—will gradually rise to 67 by 2025,
this won’t prevent System revenues from falling
short of payments.
Declining fertility has also contributed to
this rising dependency ratio. In 1950, the U.S.
1985 1995
fertility rate was 3.0, meaning the average
woman had three children in her lifetime. By


Views expressed do not necessarily reflect official positions of the Federal Reserve System.