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Q & A

Saturday, October 1, 2005

Why is Social Security described as a pay-as-you-go system?

Social Security taxes that are paid by current workers are used to fund payments to today's benefit recipients, rather than being invested in accounts or otherwise set aside to finance the retirement benefits of those currently paying taxes.

Do people work longer today, on average, than they did in previous decades?

No. In recent decades, people have been entering the labor force at a later age while retiring at an earlier age. Consequently, the proportion of life spent working has declined.

What is the dependency ratio, and why is it a problem for government pension programs?

The dependency ratio is the ratio of persons out of the labor force relative to the number of persons in the labor force. In the United States and most other high-income industrial societies, there is an increasing number of retired people (receiving government pension benefits) relative to working people (paying for those benefits). Trustees of the U.S. Social Security and Medicare trust funds project that, under current law, Social Security outlays will begin to exceed payroll tax revenue in 2018 and that the Social Security trust fund will be completely exhausted by 2042.

What can be done to address the Social Security shortfall?

Policymakers face difficult decisions because there are no popular solutions. A few ways to address this problem include decreasing benefits, raising the retirement age, raising taxes or some combination of these.

The content for Q & A was largely adapted from "The Real Population Problem: Too Few Working, Too Many Retired" which was written by William Poole and David C. Wheelock and appeared in the April 2005 issue of The Regional Economist, a St. Louis Fed publication. For the entire article, go to