Unsustainable Dependency

*This is a slight modification based on the objection of rbdwiggins below.  I had originally titled it “The Looming Retirement Bomb” but he pointed out that was a somewhat myopic title since the problem I am pointing to is broader than retirement alone.

Let’s consider a country where everybody decides to work for two years, put half their money in the bank and then vacation for two years.  This wouldn’t work because there would be nobody to sell groceries in the vacation years (because they are on vacation).  How about everybody in the nation except 1 person?  Still doesn’t work because nobody can provide for everybody.  The problem is similar if you try to tax 1 person enough to provide for everybody else, the tax rate doesn’t matter because there isn’t enough labor to provide for everyone.  In our nation we have a very real increasing dependency problem of which retirement plays a significant role, and a role much bigger than simply unfunded SS and Medicare.  The entire concept of independent retirement (i.e. not living with your children) is very recent in anthropological terms (post WWII), and has depended on a few very peculiar factors, two that had never been seen before in human history.  They are (in order of importance):

1) Returns from the Industrial revolution (the amount of labor needed to support basic living decreased as chairs and shoes could be mass produced and homes were heated by coal rather than splitting your own firewood)

2)Favorable demographics (global baby boom leading to low retiree:worker ratio)

3) A growing economy (boom from 60’s through 2000 allowed a siphon of several percentage points of GDP while the average worker still saw his standard of living improve)

The baby boomers are beginning to retire (raising the number of retirees), but there are other retirement related problems that are just as pressing – not enough new young workers (thank you abortion), stagnant economy (if the cost of retirement goes up the standard of living of workers must go down, we haven’t been able to improve both in our economy since 1998), and the cost of medicine and elder care are growing faster than the economy (offsetting the industrial revolution boom).  These tend to eliminate all the benefits that allowed retirement in the post WWII era.  We think of this as an entitlement problem, but it is much bigger than that.  The amount of labor required to keep a retiree at a standard of living approved by the government has gone up while the number of laborers is flat and set to decrease.  Let’s calculate a rough dependency ratio for the US:

Total number of workers in the US: ~136M

Total number of people in the US: ~314M

However, government operates by taking money from workers and redistributing it (Social Security) or consuming it (DOE) without providing much in the way of service.  So, we should scale down the number of workers by the governmental proportion of GDP (~40% altogether).  Let’s however assume that some governmental spending adds to production (by building roads, harbors, preventing invasion, educating, etc) and drop the percentage to 20% of total GDP.  That would mean there are actually ~108M people working to support a total population of 314M, or a dependency ratio of 3:1.  This is even worse if you consider the number of workers who consume more each year than they contribute to GDP, or if less than half of government spending is productive.  The dependency ratio may have already ballooned to 4:1 (government usefulness of 25% and 80% of laborers covering their own lifestyle without subsidies).  The government looks at worker to retiree ratio, but that is not the right metric.  Many people have jobs serving retirees or other non-contributers and so they are considered workers, but their labor is dedicated to areas that by definition do not grow the economy.  Also, many workers consume more in services than they produce through labor (like those receiving SNAP benefits).  Or in other words, if every unit of labor were dedicated to serving non-workers then who would feed the workers?  If everyone is a Medicare provider, teacher, or social worker then who farms?

Normally market signals would adjust and keep the dependency ratio at something sustainable by raising the price of labor and making not-working (either retirement, disability, or otherwise) more expensive, and savings would cover less of a time out of the marketplace (shorter retirement, less likely to stay on welfare etc).  However, wage and inflation adjustments applied to government benefits (social security, SNAP, Medicare, welfare, etc) removes the ability of the market to make not working more expensive.  So, as more move out of the excess production side onto the excess consumption side the government must extract a greater toll from the productive workforce in order to match the market driven wage increase that comes from a higher dependency ratio.  This drives up the personal cost of working (taxes) while leaving the personal cost of not working (benefits) untouched.

At some point this system cannot continue just as one man cannot feed a nation no matter what the man is payed or taxed.  I don’t know when that point will be, but it is coming and I think it is coming quickly.  I suggest that very few can support more than 4 other people at a level approved by the US Government (esp. the very high and growing cost of Medicare).  As the 22 million Americans 50-55 are replaced in the workforce by the 20 million Americans 10-15 over the next 10 years that may very well collapse the system.  This is even more likely if the new generation begins their life with subsidies (staying on their parent’s insurance plan until 26 and getting PELL grants and Stafford loans to subsidize “the college experience”) and so delay contributing to the economy.  Obamacare is just one part of dependency, but in my opinion it will be the straw that will break the camel’s back.  Each family can only cover so many people.  After a married couple pays for themselves, their children, and their own parents how much do they have left to cover freeriders?  Likely less than what is being promised.