July 29, 2012 · 0 Comments
By Dean Baker:
While many of us learned arithmetic in third grade, apparently there are not enough people who retained this knowledge for the NYT to staff its opinion page. Hence they have Thomas Friedman warning us that the retirement of the baby boom cohort is going to devastate the country.
Now, if Friedman could do arithmetic he could turn to the Social Security trustees report and see that they project the ratio of workers to retirees to fall from 2.8 in 2012 to 2.0 in 2035. Is that scary?
Here’s where Mr. Arithmetic can help us. Let’s assume that retirees on average consume 75 percent as much as the working age population. That’s not their Social Security benefit (SS benefits are less than 40 percent of the average wage), this is their total consumption. Remember, they don’t have to travel to and from work every day, they don’t need to arrange child care, or incur other work related expenses.
If workers are taxed or in some other way have their consumption reduced to support retirees, then they currently get to keep 78.9 percent of what they make. The rising number of retirees will reduce this to 72.7 percent by 2035. This means that if nothing else changes workers would see a 7.8 percent decline in their take home pay as a result of this demographic change.
Fortunately, something else will change. It is called “productivity growth.” Currently productivity growth, adjusted for some index issues, is about 1.5 percent annually. Over the next 23 years this rate of productivity growth would imply an increase in average wages of 40.8 percent, more than five times the loss due to demographics.
What’s more, 2035 is a low point on demographic spectrum. The ratio of workers to retirees is projected to be pretty much stable over the next three decades. Each decade productivity growth should raise wages by another 16.1 percent if we maintain the current growth rate. In other words, there is no reason to think that demographics will cause workers to see declining living standards in the future.
There are important issues here about future living standards. Because of our broken health care system an ever larger portion of compensation is being diverted to health care. This is a drag on living standards, but the problem is our health care system, not demographics.
There is also the problem of inequality. Most workers have seen few gains from productivity over the last three decades because such a large share of income has been shifted to those at the top. If this trend continues it also threatens the living standards of workers in the future.
But Thomas Friedman apparently doesn’t understand these facts. Instead he is trying to get readers to focus on something that is not a problem, the aging of the population.