Chief among the effects from a shift in America’s age structure is the impact on the elderly population. Unfortunately, this change is not encouraging. As the “baby-boomers” generation poises itself for retirement, there is significant evidence extracted from current trends as to why the elderly population may be in for a surprise in the years to come. Specifically, retirees will see a reduction in elderly benefits programs. This trend may continue further into the 21st century considering the effects that already waning fertility rates will have on the workforce. Although the elderly are at the front and center, their growing percentage of the U.S. population combined with higher medical costs may lower the standard of living for people of all ages, especially middle-income taxpayers. As threat looms on the horizon, the U.S. must implement policy to avoid compounding burdens on the generations of Americans to come. To minimize this impact, it is necessary to increase the rate of savings in this country.
An assessment of historical data, current trends and future projections is vital to the argument that America must increase their savings rate to avoid financial catastrophe. The Social Security Administration’s collection and analysis of data certainly is of the highest caliber. In their best estimation, in 2035 there will be 379 people 65 years or older for every 1,000 Americans aged 20 to 64. In 1960, this relationship was 173 per 1,000; by the early 1990’s, it only reached to 209 per thousand.[1]
In addition to the unequivocal indication that old people will reach unprecedented highs in terms of their percentage of the total U.S. population, the SSA provides further evidence supporting the need to increase savings. Substantial public spending on senior citizens is growing due to the rising costs in programs for the elderly. In the United States and other developed countries, public spending per person on the elderly is between two to three times the spending per child.[2] In 1990, a report compiled by Congress estimated that federal spending on the elderly totaled $356 billion or $11,290 per person. This amounts to 28% of total federal spending compared to 16% from 1960.[3] Two programs illuminating these trends are the old age, survivors and disability insurance program (OASDI) as well as both hospital insurance (HI) and supplemental medical insurance programs (SMI).
Forecasts for OASDI and HI spending are prepared in pessimistic, intermediate and optimistic assumptions, but all of them illustrate the need to increase savings to some extent or another. Under OASDI, spending on social security pensions by 2035 will reach between 5.2% and 7.9% of GNP. Medicare costs are even higher by 2035 and they offer proof that the burgeoning elderly population is not so much a factor as rising program costs. Specifically, spending on Medicare-insured people is growing at a faster rate than spending on social security pensioners, and this rate is approximately twice that of price inflation. Thus, a higher percentage of federal money must be secured for Medicare, primarily due to rising medical costs rather than the growing elderly population.[4] As these forecasts expose the problems that will exist in the near future, the new challenge is to establish a successful plan without curtailing benefits for seniors.
Without doubt, these high costs have come hand in hand with expensive new programs like Medicare and Medicaid as well as the liberalization of established programs such as social security.[5] Despite political efforts to limit elderly benefits as per the 1977 and 1983 amendments to the Social Security Act, polls show that the public is in favor of this spending.[6] Burtless forecasts that benefits generosity from Medicare will continue to increase until around 2005. After a period of 10 years, Medicare costs will still rise, but the elderly population will begin to see their benefits decline. The reason for this is entirely subject to the vast growth among their population. However, keeping the entire elderly population content with Medicare support may not be possible; cost containment of medical resources or eligibility curtailment may in fact be necessary.[7] Due to the political sway from sheer numbers of seniors as well as the fact that per beneficiary generosity are already lower than ever before, cost containment or curtailment may be unattainable. Thus, current policy makers may have to focus on extracting more money from today’s working class than ever before.
The immediate solution would be to raise taxes earmarked for elderly programs, but this may not produce the level of funds necessary and it certainly will not engender a positive response from the working class. As mentioned earlier, taxes specific to elderly programs are publicly supported, but the poll results may in fact be skewed because of a large percentage of elderly participants. Furthermore, tax hikes often lead to political suicide and are an area that even the most dedicated legislators never dare to venture. Considering the fact that increased taxes may not be enough and the expected political limitations, other channels to maintain support for the elderly population must be considered. Investing generated surpluses from these programs is this alternative route.
To begin to consider fiscal policy as a remedy for the problems ahead, the theoretical framework underlying this option deserves attention. With the surpluses from both Medicare and social security, the government has the base to improve future standards for both retirees and workers alike. In theory, OASDI and Medicare surpluses are invested in the U.S. treasury to earn interest similar to the rate of medium treasury bonds. What is considerable about this application is not interest accumulation itself, but the available financial options left open to the government and the public. Theoretically, investing will allow the government to borrow less from outside sources and simultaneously enhance private investment. The net result is more domestic capital stock and a GNP that grows further than when this policy is neglected.
If these surpluses are large enough (which they are), investments can readily improve worker productivity and create generous wages. Considering this, if a tax rate increase is imposed upon workers at their higher wages, their standard of living is not improved, but more importantly, it is not harmed. Those who are to enter retirement during the years of this policy will in turn receive higher incomes as their private benefits packages are often determined from their final years’ labor.[8]
It is essential to note that this policy cannot work independently. If the government were to run up the national deficit as during the 1980’s under Ronald Reagan, any outgrowths from surplus investments would offset. In addition, a watchful eye on the levels of program taxes and benefits are necessary to keep up surpluses as time passes and the elderly population swells. In a study completed by Burtless and his colleagues in 1989, it was found that increased investment under a reduced deficit and a close actuarial balance of elderly accounts would in fact create a larger capital stock, higher labor productivity and increased wages. The key finding in the study was the result this policy had on national consumption. In effect, higher consumption levels facilitated by growth in capital stock would more than compensate for the heavy price tags from a shift in the nation’s age structure.[9]
The idea of increasing the savings rate to lessen the burdens of upcoming generations is certainly not without its critics. David Cutler and company believe that increasing savings today to offset consumption drops in the future is simply not productive. Instead, they claim that because lower fertility rates will lead to declines in future workforce numbers, less money from savings is needed to provide for this smaller population of workers. Although this defense of the current savings rate makes sense, it relies on a limited premise. The opposition constructs their defense by considering birth dearth as the only change in the economy. Unfortunately, there argument is deficient because they forget other essential variables such as the productivity growth rate, aging of elderly population and the rate of both public and private savings.[10]
It is obvious from the established evidence that mapping out a financing scheme today for future generations is a task that deserves more attention. In doing so, the federal government must develop a well-balanced game plan taking into account the aging population, the lower fertility rate, rising medical costs, public and private spending and the status of the working population. The most reasonable path on which to proceed is to increase the national savings rate by investing surpluses generated from these programs. To establish program solvency, it is necessary to not undercut or overestimate the funds that the elderly need. Overgenerous benefits and a plummeting fertility rate can combine for economic shock such as in Brazil today.[11] Already the rate of savings is lower than the norm and in light of the severe deficits created during the 1980’s, it is evident that some form of fiscal policy is necessary to provide for the emerging elderly population. It is imperative that the U.S. takes advantage of these large surpluses generated from the “baby-boomers” before they begin to retire and these accounts begin to fall. Although this policy may need support from temporary increases in taxes in the years ahead, the U.S. will benefit later if minor sacrifices are made today.
[2] Phillip J. Longman, "The World Turns Grey" in U.S. News and World Report, Vol. 126, No. 8, March 1, 1999.
[3] Burtless, 227
[4] Burtless, 228-230
[5] Burtless, 225
[6] Burtless, 232
[7] Burtless, 238
[8] Burtless, 243
[9] Burtless, 246-47
[10] Burtless, 248
[11] Phillip J. Longman, "The World Turns Grey" in U.S. News and World Report, Vol. 126, No. 8, March 1, 1999.