Question

Social Security is facing a challenge in the future. According to your textbook, by 2075 the old age dependency ratio will be approximately 0.4. Which means that each retired person is supported by 2.5 working people. That's much higher than it has been in the past 0.2. This concerns many people in the question arises will Social Security run out of money? Please explain your initial post how would you solve this problem.

Answer 1

The dependency ratio is the ratio of people who are not working to the number of people who are working to support them. Old or senior citizens are mostly part of dependent population along with children. According to the data in the text book dependency ratio is going to rise from 0.2 to 0.4. This means every 5 working people financially supporting 1 dependent will reduce to 2.5 working people financially supporting 1 dependent. Social security will indeed face a challange. But, the problem discussed is quite cyclical in nature i.e. over a long period of time social security will keep facing the problem in intervals. This means, as the demographics change the population in every age group changes. Thus, it is natural that dependency ratio will cyclically increase and decrease over a long period of time. Thus, it is important to forecast the mean of the cyclical variation. If the dependency ratio is below the mean it can be expected to surpass the mean in the coming years. Thus, the budget should be allocated by Social Security in tandem with the mean depndency ratio. When below the mean, expenditure of Social Security will fall below the budget. This, should be used when dependency ratio is higher than the mean. SInce the cycle is inevitable, such an amortisation policy can smoothen their expenditure and reduce the burden of increasing dependency ratio.