The impact of cost of living and population changes on the social security system

The social security system offers an interesting challenge to modelers. It is probably the only program in the government sector that is essentially a closed system since revenues must equal receipts if the system is to remain self-financed. Furthermore, the program is now tied to changes in the Consumer Price Index (CPI)and average wages rather than to the convenience of legislators. (This is subject to change.) Most features of the system can therefore be modeled from economic and demographic variables alone. To model the system one needs a population sector, estimates for changes in the CPI and wages, and unemployment and labor force participation rates, and information on the relationships between these variables and social security benefits and receipts. This paper presents a model which traces social security receipts and expenditures from 1950 to the present and then projects them to the year 2000. To find the impact on the system, one enters the appropriate unemployment and labor forceparticipation rates, CPI changes, and the rate of increase in average wages. As predicted, tax rates will need to increase if the system is to remain self-financing under anticipated future conditions. One new aspect to this model is the introduction of varying labor forces participation rates for women. If female force participation rates increase, projected tax rates can decrease and the changing age structure of the population will not have the anticipated effect at the end of the century.