Latest / The Demographics Podcast with Fexingo: Aging Populations, Birth Rates, and Economic Impact / Why Declining Birth Rates Threaten Public Pension Solvency
Transcript
- Lucas: The year is 1935. Franklin Roosevelt signs the Social Security Act into law. At that moment, there are about 42 workers paying into the system for every one retiree collecting benefits. A ratio of 42 to 1. Luna: Forty-two to one. That almost sounds like a typo. Lucas: It's not. And fast-forward to 2026. That ratio has collapsed to roughly 2.8 workers per retiree. By 2050, the Social Security trustees project it falls to about 2 to 1. Luna: So the whole pay as you go math — current workers funding current retirees — gets squeezed from both sides. Fewer workers, more retirees. Lucas: Exactly. And the birth rate is the long-term driver. The US total fertility rate is around 1.6 children per woman today, well below the replacement level of about 2.1. That means each generation of workers is smaller than the one before it, but the retiree population keeps growing as boomers age. Luna: The Social Security trustees' latest report — I think from 2025 — puts the trust fund depletion date at 2035. That's nine years from now. After that, if nothing changes, benefits would have to be cut by about 20 percent across the board. Lucas: Right. And the usual policy toolkit has three levers: raise the payroll tax rate, cut benefits, or push the full retirement age higher. Most reform proposals do a mix. But here's the demographic angle that doesn't get enough airtime: the birth rate isn't just a side issue — it's the structural reason the math breaks in the first place. Luna: So let's compare how different countries are handling this. Sweden gets mentioned a lot. Lucas: Sweden reformed its public pension system in the 1990s. They moved to what's called a notional defined-contribution model. Basically, each worker has an individual account that tracks their lifetime contributions, but the 'notional' part means the money isn't actually invested — it's still pay as you go at the aggregate level. The key innovation is an automatic balancing mechanism. If the system's liabilities exceed its assets, benefits get trimmed automatically. Luna: So the adjustment is pre-committed and formulaic. No waiting for Congress to act. Lucas: Exactly. And it's worked. Sweden's system is projected to be sustainable for decades despite their fertility rate being around 1.7. The automatic mechanism builds trust because people know the rules won't change arbitrarily. Luna: Chile went much further in the 1980s — fully funded individual accounts, privately managed, no pay as you go at all. That was under Pinochet, but the system has outlasted that government. Lucas: Chile's system is the extreme version. Workers contribute 10 percent of wages into individual accounts managed by private pension funds. When you retire, your benefit depends entirely on what you accumulated. It solved the demographic sustainability problem — because there's no promise from the state to future retirees — but it created a new problem: adequacy. Many workers ended up with very low benefits because of gaps in contributions, low returns, or high fees. Luna: And there's been massive protests in Chile demanding reform. So purely funded systems have their own equity issues. Lucas: Right. Every system trades off between adequacy, sustainability, and predictability. The demographic squeeze makes that trade-off more painful. Luna: I want to bring this back to the US. The worker to retiree ratio I mentioned — 2.8 today, heading to 2 by 2050. What does that actually mean for a typical worker? Lucas: Let's use concrete numbers. In 2026, the maximum Social Security benefit for a worker retiring at full retirement age — 67 for people born after 1960 — is about $4,000 a month. With current law, once the trust fund is exhausted in 2035, benefits would be cut automatically to about $3,200. That's a $800 monthly hit for someone who planned on the full amount. Luna: And that's the do-nothing scenario. But the payroll tax rate is 12.4 percent split between employer and employee. Raising it by, say, 2 percentage points would close about half the gap. Lucas: That's what some proposals suggest. But here's the thing — raising payroll taxes falls disproportionately on younger workers, who are the ones already facing lower birth rates and potentially lower economic growth. They're being asked to pay more for a system that may not be there for them in the same form. Luna: Which brings up generational equity. Millennials and Gen Z are having fewer kids themselves, partly because of economic pressures. So they're caught in a loop: they pay higher taxes to support boomers, which makes it harder to afford children, which then makes the demographic problem worse for the next generation. Lucas: A couple of dollars a month is genuinely what keeps these shows going. If walking through the economy with us has made something click — buy me a coffee dot com slash fexingo. It really does add up. Luna: Yeah, and we keep it ad-free because listeners support it directly. So if you've gotten value from episodes like this one, that's the place. Lucas: Now, South Korea is the canary in the coal mine here. Their fertility rate hit 0.72 in 2023 — the lowest in the world. And their national pension system is still largely pay as you go, though they introduced a funded component in the 1990s. The projections are brutal: the fund is expected to be depleted by 2055, and that's assuming the current low birth rate doesn't get even lower. Luna: South Korea also has a rapidly aging society. The old-age poverty rate there is over 40 percent — the highest among OECD countries. So the pension system is already failing many retirees even before the demographic crunch. Lucas: Exactly. And they've tried reforms: raising contribution rates, lowering replacement rates. But the politics are incredibly difficult because the current elderly vote, and younger voters don't feel the pain yet. It's a classic time-inconsistency problem. Luna: So what about immigration? Could it meaningfully improve the worker to retiree ratio in countries like the US or Japan? Lucas: Immigration can help at the margin, but it's not a structural fix. The US admits about 1 million legal immigrants per year. Even if we doubled that, the Congressional Budget Office estimates it would push the Social Security depletion date back by only about 5 to 7 years. Why? Because immigrants also age, have children at rates that converge to the native-born average within a generation, and eventually become retirees themselves. Luna: So it's a temporary bridge, not a permanent solution. Lucas: Right. And the countries that need immigration most — Japan, South Korea, much of Europe — have less political appetite for it than the US does. Japan has been very restrictive, and their population is shrinking by about 500,000 people per year. Luna: There's another lever we haven't talked about: later retirement ages. The US full retirement age is already 67 for those born after 1960. Some proposals push it to 69 or 70. Lucas: That's probably the most powerful single lever. If you delay the full retirement age by two years, you reduce lifetime benefits by roughly 10 to 15 percent, and you also increase the number of years people contribute. But it's regressive: people in physically demanding jobs — construction, nursing, warehouse work — can't always work longer. So you need exceptions for those groups. Luna: Denmark actually indexes its retirement age to life expectancy. So as people live longer, the retirement age automatically rises. That's a clever design. Lucas: It is. Denmark's retirement age is currently 67, but it's scheduled to reach 70 by 2040. And because the adjustment is automatic, there's less political drama. That's the lesson from Sweden and Denmark: pre-commitment mechanisms work better than ad hoc legislation. Luna: But even with later retirement, the birth rate problem remains. If fertility stays at 1.6 in the US, the population eventually starts declining. And a shrinking population means a shrinking economy unless productivity growth compensates. Lucas: That's the deeper story. Public pension solvency is just one symptom of a broader demographic shift. The real question is whether economies can adapt to permanent low fertility — or whether fertility will eventually rebound as societies adjust. Some economists argue that as automation and AI increase productivity, we'll need fewer workers, so the demographic scare is overblown. Luna: I've heard that argument. But it assumes productivity growth will be strong enough and evenly distributed. If the gains go mostly to capital owners, then workers — who are the ones paying payroll taxes — won't see the wage growth needed to support the system. Lucas: That's the right critique. Ultimately, pension systems are claims on future output. Whether you finance them through taxes or savings, the real resources have to be produced by the next generation of workers. Birth rates determine how many workers there are. Productivity determines how much each can produce. Both matter. Luna: So where does this leave a 30-year-old listening today? What should they expect for their own retirement? Lucas: Honestly, I think the prudent assumption is that Social Security will pay less in real terms than it does today — maybe 70 to 80 percent of promised benefits. People should save more on their own, expect to work longer, and pay attention to how their country's system is designed. If you live in a country with automatic stabilizers like Sweden, you have more certainty. If you're in the US, the political uncertainty is itself a risk. Luna: And the birth rate conversation isn't just about pensions. It's about whether we're building a society where people feel they can afford to have kids. That's a much bigger question. Lucas: It is. And maybe that's where the policy discussion should start: not with trust fund depletion dates, but with why people are having fewer children in the first place. Fixing that might solve the pension problem downstream.