Intergenerational Real Benefits in Social Security (Rosser Equation Illustrated)




by Bruce Webb

In 2003 CBO published an Issue Brief illustrating the relative contribution of Aging and Real Benefit Growth to future Social Security spending called The Future Growth of Social Security: It’s Not Just Society’s Aging with results graphed above:.

Discussion under the fold.

Approximately 55 percent of the higher spending is due to an expected increase in the number of beneficiaries, as the number of new claimants grows and as life expectancy rises. The Social Security trustees estimate that the population age 65 or older will increase from 37 million today to 75 million in 2035 and to 95 million in 2075.
Life expectancy for people currently age 65 is estimated to be 83 years. In 2035, it is estimated to be 85 years, and in 2075, 87 years.
The remaining 45 percent of the rise in spending is due to a projected increase in the real value of Social Security benefit checks. Under the trustees’ assumptions, the purchasing power of the average earner’s benefits at retirement is expected to nearly double between now and 2075.Source: Congressional Budget Office.

This increase in purchasing power is the result of adjusting initial retirement benefits by real wage increases over the worker’s lifetime. The end result is that retirees share in both the upside and downside of economic growth, if Real Wage for workers is stagnant so do will be initial benefits, if on the other hand workers gain Real Wage increases in line with the traditional relation found between Productivity and Wage (something that broke down some the last decade) then the rising tide really will lift all boats.

A couple of further notes. If retirement benefits are projected to increase in real terms by close to 100% over the next 75 years, then a projected cut of 20-25% on Trust Fund exhaustion would STILL see those future workers with larger baskets of goods than similarly situated retirees (this is what we call ‘Rosser’s Equation’).

But this real term increase doesn’t come at the expense of younger workers still in the work force, at least not without some forced special pleading. The goal clearly shown in Fig 2 is to keep overall replacement values steady with each future generation just able to hold onto its share of the overall societal increase. This seems fair to me.

There are some that insist that if you ‘really’ look at the numbers you will see that Social Security was simply too generous to earlier generations. How you reconcile this with these graphs showing that each generation will be able to afford a bigger basket of goods than their predessessor would seem difficult. Because arguments from ROI (but I could have had EVEN MORE, and screw Grandma) seem pretty hard-hearted and selfish. But perhaps someone can make the moral case in comments.

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