Tuesday, 7 June 2011

Scared by the pension time-bomb?

In Europe and America most people worry about the so-called Social Security time-bomb.

Its ticking is usually measured by the ratio between the number of active workers to Social Security recipients. In the USA this ratio declined from 17-to-1 in 1950 to 3-to-1 today. Are you scared by this trend?

Here is some arithmetic to calm you:
a) The fact that now it only takes 3 workers to support themselves and one pensioner is only possible because productivity has risen more than 2.93% annually (on an annual compound basis).
b) This was only possible due to the extraordinary economic growth during the golden fifties and sixties. Since then the productivity growth slowed down to an annual rate of 1.83% over the past 40 years.
c) Yet, if we are capable of maintaining this same productivity growth over the next 60 years we will need only a ratio of 1-to-1 by 2070.
d) I have not checked the demographic projections, but I believe that by then the working age cohort of 18-70 year olds still exceeds the other two age groups. So it is just a matter of keeping them employed.

Although I am not particularly worried about the demographics, I am concerned about the financial consequences of such ratio. Why? Because to be able to pay the pensions for all the retirees the pension funds must own a much larger share of the national wealth than they own today.

However, given the current degree of wealth distribution in America (where the richest 1% own more than 30% of total wealth) it is unlikely that pension funds will be able to accumulate such share of total wealth by normal means. I am afraid that some form of expropriation will have to take place in the future.

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