Dependency Ratio and How It Affects You
What the US Dependency Ratio Says About Social Security
The dependency ratio is the number of dependents in a population divided by the number of working age people. Dependents are defined as those aged zero to 14 and those aged 65 and older. Working age is from 15 to 64.
The ratio describes how much pressure an economy faces in supporting its non-productive population. The higher the ratio, the greater burden carried by working-age people. The ratio is most often used when discussing the viability of Social Security because it's paid for with payroll taxes.
The World Bank releases an age dependency ratio. It only reports on the proportion of senior dependents per 100 working-age population. Its formula is the number of seniors age 65 or older divided by the working-age population aged 15 to 64. It doesn't count children.
How the Ratio Is Calculated
The dependency ratio formula is:
DR = (Y + S) / (W x 100)
- DR = Dependency ratio
- Y = Youth aged 0-14
- S = Seniors aged 65+
- W = Workers aged 15-64
The World Bank's age dependency ratio formula is:
DR = S / (W x 100)
- DR = Dependency ratio
- S = Seniors aged 65+
- W = Workers aged 15 - 64
Current U.S. Dependency Ratio
The U.S. dependency ratio is 51.2, or 51.2 dependents for every 100 working age person. It's 108.3 million dependents divided by 211.6 million working age people. That's lower than in 1950, when it was 53.9. There were 55.6 million dependents divided by 103.2 million workers.
The U.S. age dependency ratio tells a different story. In 2015, the ratio was 22.1. There were 46.8 million seniors divided by 211.6 million workers. But it's almost double the 1950 ratio of 12.6. At that time, there were 13 million seniors supported by 103.2 million workers.
The age dependency ratio has increased because so many baby boomers have reached retirement age.
It hasn't affected the overall dependency ratio because the number of children per worker is decreasing. In 2015, the child dependency ratio was 29. That's 61.5 million children divided by 211.6 million workers. In 1950, the ratio was 41.3. There were 42.6 million children divided by 103.2 million workers.
The ratio doesn't take into account increasing longevity. Seniors over age 80 have more health problems than younger seniors. For example, 64 percent of women aged 65 to 74 have hypertension. Almost 80 percent of women 75 and over have the disease. That will make the cost burden on workers higher.
To plan for that, another age dependency ratio should be created for those in their 80s. The U.N.'s data revealed that there were 1.8 million seniors 80 or older in 1950. This very senior dependency ratio was 2. By 2015, the ratio had tripled to six. There were 11.9 million seniors in the 80s or older supported by 211.6 million workers.
Economic Dependency Ratio
These estimates assume that all those in the dependent age groups don't work and all those aged 15 to 64 do work. In real life, that's not true. Not all of those aged 65 and older have stopped working. Many of those aged 15 to 64 are not working for various reasons.
To be more accurate, dependency estimates should also include the labor force participation rate for each age group. The Bureau of Labor Statistics estimates this for each five year increment from 16 and older. It reveals that the LFPR is dropping overall because those aged 16 to 24 are going to school instead of entering the labor force. That means the other age groups are taking up the slack.
By 2026, the percentage of those who are working after age 65 will increase to 21.8. That's up from 2016, when 19.3 percent were in the labor force.
The BLS uses this to estimate the economic dependency ratio. It's the number of non-working civilians per 100 in the labor force. In 2016, there were 101 dependents for every hundred workers. That includes 40 under 16 and 25 over 64. In 2026, the ratio will drop to 39 for the youth and increase to 31 for the seniors. Even though a larger percentage of seniors will be working, it won't be enough to make up for the lower percentage of those 16 to 24. The burden on working age people will increase.
How It Affects the Economy and You
The U.S. child dependency ratio is falling while senior ratio is rising. The very senior ratio is rising the fastest. As a result, workers will have to pay more for seniors, but less for children.
So does it even out? No, because there are more social services for seniors than for children. In fiscal year 2019, Social Security will cost the federal government $1.046 trillion and Medicare will cost $625 billion. Medicaid will cost $412 billion. This program is only for low-income people, but 23 percent of its budget goes toward seniors and 19 percent to children.
This sounds an alarm bell for the current working age population. They will have even fewer children to support them when they become seniors. What will be the impact?
For years, the Board of Trustees for the Social Security Trust Fund has warned that these demographic changes are leading to the Fund's demise. The Fund is paid for by payroll taxes. But in 2010, Congress enacted the Obama payroll tax holiday and extended the Bush tax cuts to fight the Great Recession.
As a result, it was the first year that Social Security payroll tax income didn't cover benefits. It received $637 billion from payroll taxes but paid out $702 billion in benefits. Fortunately, it had income from investments and income taxes on the benefits to cover its costs.
In 2011, the situation worsened. The Fund required $102.1 billion from the General Fund, making it the first year Social Security costs increased the budget deficit.
In 2013, the fiscal cliff deal ended the 2 percent payroll tax holiday. The Obamacare taxes on high-income households also began in 2013. That increased revenue to the Social Security Fund and improved its cash flow shortfall.
But it won't help with the long-term demographic changes. The Fund's $2.9 trillion in assets could be depleted by 2038. At that time, the payroll tax income will only cover 75 percent annual benefits.
Fixing the U.S. Dependency Ratio
An article in Forbes magazine recommends three solutions. One suggestion is to encourage immigration. It would raise the number of younger workers. That would improve the elderly dependency ratio today. The young immigrant families would have more children than older families. That would improve the elderly dependency ratio in the future as the children become workers themselves.
Another is to increase the number of children by raising fertility rates. One way to make it easier for women to have children is to subsidize child care.
A third is to help seniors become healthier so they don't burden Medicare and Medicaid with higher doctor bills. Along those lines, create incentives for them to work longer and delay receiving Social Security benefits.