A Model of Consumption

The Social Security system in the United States went into deficit in 2010: tax receipts were insufficient to cover expenditures. This was largely because the recession led to reduced receipts from the Social Security tax. However, the Social Security Board of Trustees warns that “[a]fter 2014, cash deficits are expected to grow rapidly as the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers.” [1] It is hard to reconcile these statements with the model that we developed in Section 13.1 “Individual and Government Perspectives on Social Security” and Section 13.2 . If Social Security is an irrelevance, why is there so much debate about it, and why is there so much concern about its solvency? The answer is that our model was too simple. The framework we have developed so far is a great starting point because it tells us about the basic workings of Social Security in a setting that is easy to understand. Don’t forget, though, that our discussion was built around a pay-as-you-go system in a world where the ratio of retirees to workers was not changing. Now we ask what happens if we complicate the demography of our model to make it more realistic. The Baby Boom During the period directly following World War II, the birthrate in many countries increased significantly and remained high for the next couple of decades. People born at this time came to be known—for obvious reasons—as the baby boom generation. The baby boomers in the United States and the United Kingdom are clearly visible in Figure 13.6 “The Baby Boom in the United States and the United Kingdom”, which shows the age distribution of the population of those countries. If babies were being born at the same rate, you would expect to see fewer and fewer people in each successive age group. Instead, there is a bulge in the age distribution around ages 35–55. (Interestingly, there is also a second baby boomlet visible, as the baby boomers themselves started having children.) Figure 13.6 The Baby Boom in the United States and the United Kingdom If the same number of people were born every year, then a bar chart of population at different age groups would show fewer and fewer people in each successive age group. Instead, as these pictures show, the United States and the United Kingdom had a “baby boom”: an unusually large number of children were born in the decades immediately following World War II. In 2010, this generation is in late middle age. Source: US Census Bureau, International Data Base, http://www.census.gov/population/international/data/idb/informationGateway.php. “The US Baby Boom over Time” presents the equivalent US data for 1980, 1990, and 2000, showing the baby boom working its way through the age distribution.