By Mark J. Warshawsky

This post is the first in a series of four posts on Social Security reform written to complement “Reforming Social Security” in the spring 2022 issue of National Affairs. You can also view a Social Security reform slide deck here.

In the 2021 Social Security and Medicare Trustees’ Reports, the assumed long-range fertility rate was surprisingly increased from 1.95 expected lifetime births per woman in 2020 to 2.0 in the 2021 reports, along with an adjustment to delay births later in women’s lifetimes. This increase in the overall birth rate came despite a rapid drop in the fertility rate observed in the last 13 years, falling to 1.65 in 2020, as shown in Figure 1. Although the observed decline in the fertility rate in 2008–2011 might have been thought to be temporary owing to the economic pressure and uncertainty effects of the financial crisis and recession, the subsequent extended and solid economic recovery did not see the expected increase in the birth rate. Rather, fundamental social conditions seem to be the cause of decline, as marriages are delayed and foregone. Births fell again during the COVID-19 pandemic, and the trustees expect the fertility rate to be 1.54 in 2021. Although there is cyclicality in the rates over time, and indeed it fell to 1.74 in 1976 after reaching a baby boom high of 3.68 in 1957, the rate of 1.65 in 2020, even before the full impact of the pandemic, is a record low, leading to the commonly accepted view that the widespread availability of birth control and changing gender roles have permanently reduced the fertility rate. The rate would have to be 2.1 in order to have a stable population without net immigration.

Indeed, new survey evidence and analysis of the expectations
of women having children over their lifetimes is consistent with an overall
lower fertility rate and not just a delay in timing, as assumed by the trustees
in their 2021 report. As shown below, there are two trends evident among young
women, ages 20 to 24: Their realized births have already fallen by half, from
0.54 in 1982 to 0.25 in 2019, and their expectations of additional children
over their lifetime fell from 1.92 to 1.84 over that period, for a decline of
total children expected from 2.46 in 1982 to 2.09 in 2019. But even those
lowered expectations are too optimistic, as birth realizations are always less,
by 0.3 for historical cohorts. Women now in their early 30s when surveyed in
their 20s indicated that they expected 2.44 children over their lifetime. Based
on a regression analysis, as seen in Table 1, their projected completed
fertility is 2.03, or 0.41 less than their original expectations, if nothing
else changed. Further, when adjusting for important factors affecting fertility
including marriage, religion, race, and education, the projected completed
fertility of these women is even lower, at 1.96, or 0.48 less than their
original expectations. Given that younger women now have even lower fertility
expectations than their older cohorts did, a reasonable assumption for
long-range fertility might go as low as 1.6 = 2.1 – 0.5, or perhaps 1.7 or 1.8 if
the 2019 reading is an anomaly or the regression analysis of the expectations
gap is too stark.

Using a 1.7 assumed fertility rate instead of the current
assumption of 2.0 makes a big difference in the long-range financial status of
the Social Security program. As seen in Table 2, the current 75-year actuarial
balance is a shortfall of expenses less income of a negative 3.54 percent of
taxable payroll. But if a 1.7 fertility rate is assumed, then the 75-year shortfall
increases to negative 4.26, and in the 75th year, the annual balance is
negative 6.69 instead of 4.34, as the lower birth rates result in fewer workers
paying payroll taxes to support the system.

Let’s hope the trustees revisit this key assumption in the 2022 reports, due out by law on or before April 1, and lower it to reflect the current reality and reasonable future expectations.

The post Social Security reform, part I: The fertility assumption is too high appeared first on American Enterprise Institute – AEI.