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Immigration is assumed to stay at the same level in the future as recently, 900,000 per year. This is probably too low an estimate. Higher immigration will be better for Social Security, as immigrants are mostly young working-age people and their children. A more likely, but still low-side (pessimistic) estimate would be that immigration would grow, say proportionally to the U.S. population, so that the number of immigrants per year as a percent of the U.S. population would remain the same. Anyway, pessimistically or not, the Trustees used a 900,000 per year rate in the Intermediate forecast for the entire 2000 - 2075 period.
Here are some thoughts on immigration from Gray Dawn.
[From Gray Dawn, Excerpts on Immigration:]
[p. 55-56:] [Immigration is already having a profound positive demographic effect in the U.S. (Positive in the sense of being mostly younger people).] "The foreign - born share of people in their 20s is nearly twice the share of people in their 60s."
[Paraphrasing a little:] "Hispanics and nonwhites now comprise 28% of the nonelderly population and 15% of the elderly population. By the year 2050, the U.S. Census Bureau expects that these shares will rise to 57% of those under 18, 51% of those under 65, and 34% of those over 65."
[This change in cultural mix and country of birth or origin will affect politics for many decades to come.] "Policy experts will debate the economic costs and benefits. Culture wars will rage over the balkanization of language and religion. Politicians will seek to placate or vilify ethnic groups. Emigre leaders will sway foreign policy. Even the fiscal politics of pay - as - you - go retirement programs will be transformed -- if the transfer of income between age groups comes to be viewed as a tribute exacted from struggling young newcomers for the benefit of privileged native - born elders.
[p. 143:] "Along with the economic advantages, high immigration countries [countries receiving a high number of immigrants] will have to accept the political challenges of managing a "clash of civilizations" within their own borders. One major challenge will be the reluctance of fast-growing non-native groups of immigrants, most of whom send income abroad to their own elder parents and families, to comply with "generational contracts" designed to transfer yet more of their income to affluent elder natives."
"Yet the biggest problem with higher immigration as an aging strategy lies in the numbers. As I've already noted, immigration would have to double, triple, and even quadruple over today's levels -- and remain at these higher levels permanently -- to sizably reduce the fiscal burden of aging. This would be wrenching for any society, but will be especially traumatic for host populations that are no longer reproducing themselves, since even a small influx will cause the foreign - born to grow rapidly as a share of the labor force."
[p. 98:] Higher immigration is surely part of the solution in some countries, but few nations are likely to tolerate -- politically or socially -- the extra immigration needed to make a real difference. If the U.S. wanted to achieve the long-term equivalent of raising its fertility rate by 25 percent, that is, from 2.0 to 2.5, American voters would have to accept an extra million immigrants annually, more than doubling the current net rate of legal and illegal immigration combined. Or consider a more ambitious goal -- entirely closing Social Security's operating deficit through the year 2030. In this case, American voters would have to accept an extra four million immigrants annually, more than quintupling the current net rate of legal and illegal immigration combined. To meet this target, America would need to accept enough immigrants to repopulate the state of Tennessee every year.
[p. 98:] In America, as throughout the developed world, a growing share of voters want to restrict immigration beneath current levels. At least for now, most governments are raising, not lowering, the drawbridge.
[From Note 1, p. 250:] It is worth noting that, like raising the fertility rate, boosting immigration permanently reduces the future retirement burden only if the higher immigration rate is also permanent. A one-time immigration surge will reduce the burden in the near term -- but increase it in the long term when today's extra workers become tomorrow's extra retirees.
[End from Gray Dawn, excerpts on Immigration]
In other words, don't expect immigrants to be thrilled to pay heavy taxes on Social Security to support wealthy native - born elderly, when they are also supporting relatives in their home countries.
And recognize that even with today's immigration levels, the non-white and hispanic population will become a majority of the non-elderly population by the year 2050. And that we will need to at least double today's immigration levels to begin to have a noticable fiscal impact.
In Table T234.1 above, note the projected small life-expectancy (at birth) increase over the next 77 years -- from 76.4 in 1998 to 81.9 in 2075, or only 5.5 years. That's only a 7.2% increase in life expectancy over 77 years. (Also, for another perspective, consider that the life expectancy at birth in Japan now is 80, which is what is projected in the U.S. in about 2042).
A 7.2% increase in life expectancy over the next 75 years seems like a pretty wild underestimate to me. That averages out to a 0.907%/decade increase in longevity, taking compounding into consideration. ( 81.9/76.4 = 1.072 = 1.00907^7.7 ). Compare that to the following historic %/decade increases in life expectancy at birth: 1940's: 7.6%, 1950's: 2.3%, 1960's: 1.6%, 1970's: 3.7%, 1980's: 2.2%, 1990's: 1.8%. (Granted, 1997 and 1998 are preliminary, and 1999 and 2000 are projected, so the 1990's decade is an estimate and partly a projection).
Table T239.1 below has more analysis of the TR99 Table II.D2 life expectancy figures. Of all the information in Table T239.1, the below segment puts the sharpest focus on the Trustees' Intermediate forecast compared to the historic record.
Growth Of Life Expectancy In Percent Per Decade
At At
Years Birth Age 65
-------- ----- ------
1950-2000 2.3% 4.6%
1990-2000 1.8% 2.9%
1998-2075:
============================
Intermediate 0.9% 2.1%
============================
Low Cost 0.4% 0.5%
High Cost 1.5% 4.0%
There does seem to be a longevity growth slowdown -- longevity growth in the last ten years, 1990-2000 (1.8 %/decade at birth, 2.9 %/decade at age 65), is considerably less than longevity growth in the last fifty years, 1950-2000 (2.3 %/decade at birth, 4.6 %/decade at age 65). But the longevity growth figures do bounce around quite a bit from decade to decade, see Section 3 of Table T239.1 below. So I don't see a smooth downward trend. (Longevity is another name for life expectancy).
I think it is conservative enough, however, to use the 1990-2000 figures as a basis to compare the Trustees' 3 scenarios against.
Recall that the Trustees forecast three scenarios: the Low Cost scenario (most optimistic), the Intermediate scenario (most likely), and the High Cost scenario (most pessimistic).
For life expectancy at birth, the 1990-2000 growth rate of 1.8 %/decade is higher than any of the three Trustees' scenarios (Low Cost: 0.4 %/decade, Intermediate: 0.9%/decade, and High Cost: 1.5%/decade).
For life expectancy at age 65, the 1990-2000 growth rate of 2.9% is higher than the Trustee's two lower cost scenarios (Low Cost: 0.5 %/decade, Intermediate: 2.1 %/decade), though considerably less than the High Cost scenario: 4.0 %/decade).
The way I read the last two paragraphs is this way: the Trustees are seriously under-estimating the growth rate of life expectancy at birth. But the Trustees seem to be in the ball-park as far as life expectancy at age 65.
On the face of it, it would seem that the most important number is the life expectancy at age 65, since that figure is roughly the average number of years that benefits will be paid. The Trustees' forecast appear to be reasonable for this item. There is no practical problem if the Trustees are under-forecasting life expectancy at birth, as long as they are forecasting correctly the life expectancy at 65. Or is there?
An underestimate of the life expectancy at birth underestimates the number of people who reach age 65 in the first place. So it is a very important parameter. (Whereas life expectancy at age 65 only tells us how long a person will live GIVEN that he/she has made it to age 65).
Contrary-wise, an underestimate of the life expectancy at birth underestimates the number of workers -- particularly older workers, but tax-paying workers nevertheless. So I admit I don't really know how strong of an impact the Trustees' apparent underestimate of life expectancy at birth will have on the future of Social Security financing, given that their estimate of life expectancy at age 65 seems to be reasonable.
===================== (240) ==========================
Table T239.1
Historic Life Expectancy, And Life Expectancy Projected
In 2075. And Historic and Projected Growth Rates In
Life Expectancy
============================================
Section 1 of Table T239.1
Historic Life Expectancy,
And Life Expectancy Projected in 2075
Calendar At At
Years Birth Age 65
-------- ----- ------
1940 63.6 12.7
1950 68.4 14.0
1960 70.0 14.4
1970 71.1 15.1
1980 73.7 16.2
1990 75.4 17.0
2000 76.7 17.5
2075 LowCost 78.9 18.2
2075 Interm 81.9 20.5
2075 HiCost 85.8 23.6
============================================
Section 2 of Table T239.1
Growth Of Life Expectancy In Years Per Decade
At At
Decade Birth Age 65
-------- ----- ------
1940-50 4.8 1.3
1950-60 1.6 0.5
1960-70 1.1 0.7
1970-80 2.6 1.1
1980-90 1.6 0.8
1990-2000 1.3 0.5
1950-2000 1.7 0.7
============================================
Section 3 of Table T239.1
Growth Of Life Expectancy In Percent Per Decade
At At
Decade Birth Age 65
-------- ----- ------
1940-50 7.6% 10.3%
1950-60 2.3% 3.2%
1960-70 1.6% 4.9%
1970-80 3.7% 7.3%
1980-90 2.2% 4.9%
1990-2000 1.8% 2.9%
1950-2000 2.3% 4.6%
1998-2075:
============================
Intermediate 0.9% 2.1%
============================
Low Cost 0.4% 0.5%
High Cost 1.5% 4.0%
============================================
Section 4 of Table T239.1
Projected Growth Rate In Life Expectancy At Birth:
Life Expectancy
At Birth
--------------- Growth Rate,
1998 2075 %/Decade
------- ----- -----------
LowCost 76.4 78.9 0.4%
Interm 76.4 81.9 0.9%
HighCost 76.4 85.8 1.5%
Historic
1990-2000 1.8%
1950-2000 2.3%
============================================
Section 5 of Table T239.1
Projected Growth Rate In Life Expectancy At Age 65:
Life Expectancy
At Birth
--------------- Growth Rate,
1998 2075 %/Decade
------- ----- -----------
LowCost 17.5 18.2 0.5%
Interm 17.5 20.5 2.1%
HighCost 17.5 23.6 4.0%
Historic
1990-2000 2.9%
1950-2000 4.6%
Source: Table II.D2, p. 62 {78} from TR99
Table II.D2 presents male and female rates separately. I calculated a simple average as (male + female)/2. All life expectancies in all sections of Table T239.1 are this simple average.
The 2000 numbers are of course a projection. The last numbers available are 1996 firm, and 1997 and 1998 are preliminary estimates:
Life Expectancy
Calendar At At
Years Birth Age 65
-------- ----- ------
1990 75.4 17.0 Firm
1996 76.0 17.5 Firm
1998 76.4 17.5 Preliminary
2000 76.7 17.5 Projected
===================================================
Productivity has been declining steadily for the last several decades. For example, here are the productivity growth rates (in %/year) for the past four decades: 1958-67: 2.9%, 1968-1977: 2.0%, 1978-1987: 1.0%, and 1988-1997: 0.9%. The Trustees assume a future productivity growth rate of 1.3%/year. That is the average for about the last 30 years, but it is quite an improvement over the last 20 years. On the other hand, productivity during the last 3 years has been substantially better.
(But per an article in The Economist, July 24, 1999, all of the productivity growth improvement of the last 3 1/2 years is accounted for by a huge 41.70 % / year productivity growth rate in the computer manufacturing sector of the economy. Computer manufacturing accounts for only about 1.2% of the total economy. The other 99% of the economy has shown no improvement in productivity as compared to the "productivity slowdown years" of 1972 - 1995. Overall, non-farm private business productivity growth (including computer manufacturing) has been 2.15%/year during the past 3 1/2 years (Q4 1995 - Q1 1999), as compared to 1.13%/year during the 23-year productivity slowdown years of 1972 - 1995. The Economist article draws heavily upon Northwestern University professor Robert Gordon's unpublished paper, "Has The 'New Economy' rendered the productivity slowdown Obsolete?". One is lead to wonder about how accurate the productivity numbers are, a point also made by the article).
Table T241.1 below shows productivity and real wages growth rates. The most important segment of information from that table is below.
---- Growth Rate, Percent Per Year ----
Real Real Wages,
Wages, Covered
Productivity Economy Employment
------------ ------- ----------
Last 40 Years
(1958-1997) 1.7 0.9 0.9
Last 10 Years
(1988-1997) 0.9 0.8 0.7
Projected
Ultimate ( 2075 ) 1.3 0.9 0.9
As for productivity, at a projected 1.3%, it is halfway between the figures of the last 10 years (0.9%) and the last 40 years (1.7%). Given that the productivity has been showing a steady downward trend (2.9% in the first decade, 2.0% in the 2nd decade, 1.0% in the 3rd decade, and 0.9% in the 4th decade), a projection of a 1.3% rate may be optimistic.
However, it is reported that in the last two or three years (1997, 1998, and 1999 so far), productivity growth has been quite good, but I haven't gone looking for the numbers yet, beyond the Economist article cited above. Just something to keep in mind.
There is little difference in real wage growth rates in the last 10 years as compared to the last 40 years. The projected real wage growth seems a teensy bit biased on the high side.
===================== (242) ==========================
Table T241.1
Historic Growth Rate in Productivity and Real Wages
1958 - 1997, And Projection Of Ultimate Rate in 2075
---- Growth Rate, Percent Per Year ----
Real Real Wages,
Wages, Covered
Productivity Economy Employment
------------ ------- -----------
10-Year Periods
1958-1967 2.9% 2.3% 2.0%
1968-1977 2.0 0.4 0.5
1978-1987 1.0 0.0 0.7
1988-1997 0.9 0.8 0.7
40-Year Period
1958-1997 1.7 0.9 0.9
Projected:
Ultimate ( 2075 ) 1.3 0.9 0.9
Meaning of columns:
------------------
Productivity: annual increases in productivity for the total
U.S. economy
Real Wages, Economy: the average annual rate of change in average
real earnings for the total U.S. economy
Real Wages, Covered Employment: The average annual rate of change in
the average real wage in OASDI (SS) covered employment
Source: TR99, from the text on page 148 {164}
===================================================
Here are some excerpts from the Gray Dawn discussion of productivity:
[Begin Gray Dawn Quotes on Productivity:]
[p. 96]. A typical claim is that economies are bound to grow faster than projected, making current benefit promises more affordable. As evidence, optimists point to the long-term real GDP growth forecasts by national and international agencies, and note that they are well beneath what the developed world has achieved historically. This is true, but it doesn't mean what the optimists suppose. Remember: GDP equals the number of workers time product per worker. Thus, when the number of workers grows more slowly, so must real GDP (assuming no change in productivity growth). When, for example, the SSA projects that U.S. real GDP growth will eventually fall from 2.5 percent annually (since 1980) to 1.4 percent (during the 2020s), it is not assuming a decline in productivity growth but a modest productivity improvement. The entire decline in GDP growth is due to the slowing rate of employment growth, from the 1.5 percent annually since 1980 to a mere 0.1 percent annually during the 2020s. With the labor force due to plateau (in the U.S.) or contract sharply (in Japan, Italy and Germany), GDP growth will necessarily slow down or even turn negative -- unless productivity growth greatly accelerates. This is not pessimism, but arithmetic.
[p. 97]. The more relevant question is whether the official assumptions about productivity (or output per worker) are reasonable. Generally, the projections for developed countries assume a long-term productivity growth rate of about 1.5 percent per year, which (surprise!) is roughly equal to their track record over the past 25 years. To be sure, productivity may pick up dramatically over the next decade or two -- but is there any reason to think it likely? According to "new economy" optimists, ongoing advances in computer and information network technologies promise to trigger quantum leaps in economic efficiency. But as yet, this promise remains unproven. As the Nobel laureate economist Robert Solow has famously observed, "you can see the computer age everywhere but in the productivity statistics."
[p. 96]. And even if productivity growth does pick up, the improvement would have to be enormous in order to offset much of the rising burden of senior benefits. Closing just the long-term U.S. Social Security deficit, according to Federal Reserve Chairman Alan Greenspan, would require tripling current rates of productivity growth.
[I think he is saying that a tripling of the productivity growth rate would increase real SS payroll tax revenues sufficiently to close the gap, without increasing the SS payroll tax rate. My thought is that even with a considerably lesser productivity growth rate -- that it still would be possible to pay a higher SS payroll tax rate to close the gap -- and still have an increase in real after-tax pay. So the Gray Dawn excerpt is somewhat pessimistically biased -JAL].
[p. 96]. Closing the long-term U.S. Medicare deficit as well would require a larger multiple.
[p. 96]. There are equally plaubible arguments that productivity growth will slow in the future. The economist William Baumol holds that services resistant to productivity improvement (especially personal services such as teaching, medicine, counseling, law, and entertainment) naturally tend to grow as a share of the economy as living standards rise. Over time, therefore, the very growth of such services inhibits improvement in overall productivity growth. Many experts think that this dynamic, sometimes called "Baumol's disease," helps explain disappointing productivity throughout the developed world over the last quarter-century. Another reason to expect slower productivity growth is more closely linked to the fiscal pressure of aging itself. Just think of the economic consequences of leaving senior benefits on autopilot -- widening budget deficits, soaring interest rates, evaporating national savings, and declining investment, both public and private. The official projections usually ignore these negative econominc feedbacks, which is sufficient grounds for regarding them as a best-case scenario.
[End Gray Dawn Quotes on Productivity]
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