Pay-as-you-go Social Security and the aging of America: an economic analysis

Because it is a mature pay-as-you-go retirement system, Social Security provides current and future workers with below-market returns. These workers bear the burden of the unfunded liability arising from windfall gains to past retirees. Alan D. Viard uses these principles to examine the effects of three demographic developments: the low birthrate since the baby boom ended in 1965, the impending retirement of the baby boomers, and the downward trend in old-age mortality. The low birthrate reduces Social Securitys long-run rate of return as the unfunded liability is spread across fewer workers. The boomers retirement does not pose a separate problem, but marks the end of the temporary gains provided by the high birthrate during the boom. Because the downward mortality trend does not change Social Securitys long-run rate of return or the number of workers across whom the unfunded liability can be spread, it need not change any workers burden. However, policy responses to the trend are likely to shift burdens from earlier generations to later ones.