Barron’s Gene Epstein recently had a column entitled “The deficit deniers should do the math”. He presents a chart from the Census Bureau showing that the percentage of the U.S. population age 65 and older, now 22.6% of the total of working age Americans, will hit 30% by 2023, ten years from now, and 36.6% by 2040.
Right now there are 4.4 people of working age supporting each senior citizen. By 2040 this ratio will fall to 2.7 working age individuals supporting each senior. If we’ve got trillion dollar annual budget deficits now, how in the world will we pay for Medicare and Social Security in 2040 when there will be so many more seniors to support?
The Congressional Budget Office predicts that, under current trends, budget deficits will fall to about $400 billion in the next few years and then begin to rapidly increase after that. The Deficit Deniers conclude that the problem therefore isn’t urgent and so we can safely postpone action until the economy is more fully recovered before we start to worry about the deficit. This is very short sighted indeed.
We’ve had an anemic 2% annual growth recovery so far from the recession which ended four years ago. What if the recovery continues to limp along without picking up steam? We’ll still have the same demographic time bomb to deal with a few years from now, and we’ll be in no better shape to deal with it then than we are now.
With a President and Senate Democratic majority unwilling to address our urgent economic (7.6% unemployment) and fiscal (enormous annual deficits) problems in a serious manner, without demagoguery, the outlook for progress is grim indeed.
So today we have 4.4 workers supporting each retiree and in 2040 we will have 2.7. And you wonder how in the world we will pay for them?
Have you thought to look at history? In 1950 there were 16 workers per retiree, and today there are 4.4, an even bigger percentage drop than we will have going forward to 2040:
And in that time our debt skyrocketed:
So how in the world did we pay for them in the past? Is it possible that however we did it since 1950 might work over the next 30 years?
Only a tiny amount of searching for facts and data shows that we have easily been able to deal with a declining workers/retiree ratio through increases in the productivity of those workers. A worker in the year 2000 needed to only work *11 hours* in order to earn the amount that a worker in 1950 did in a full 40 hour week! They only needed to work 32 hours to earn as much as in a 40 hour week in 1990!
That allowed fewer workers to support more retirees and still have higher net incomes than in the 1950’s. The Bureau of Labor Statistics predicts that productivity will increase at near the 1920-2010 average out to 2020 (about 2%, see table on p. 41):
Click to access art04.pdf
With that, we can turn to our old friend, arithmetic, in order to answer your question as to how we will pay for future retirees.
If we go from 4.4 to 2.7 workers/retiree by 2040, each of those workers will have to be 1.63 times more productive. Using the 2% growth rate, workers will be 1.64 times more productive in 26 years, or 2039!
So there you have it! Using history, we can see that productivity increase has *always* easily swamped out the demographic problem over the past 60 years, and using arithmetic and some basic facts we can see that productivity should solve the problem going forward to 2040 as well.
Ah, the power of facts, data, analysis, reason and history!
If you don’t believe my analysis, here are some others saying the same thing (again, using facts, data, and thoughtful analysis, unlike Gene Epstein who appears to be a typical fear-mongering deficit scold playing loose with the facts and data):
I should have been more explicit and distinguished between Social Security and Medicare in my remarks above. Social Security is essentially self supporting and can remain so in the years ahead with small tweaks from time to time. For example, changing the way we measure inflation, by adopting the more accurate and so-called “chained” CPI system would eliminate 25% of the shortfall for the next 50 years. Raising the income cap for the payroll tax from the current level of $113,700 in 2013 to $200,000 would remove most of the rest of the shortfall for the foreseeable future.
The demographic problem is with Medicare. The just increased 3.8% Medicare tax on payroll (up from 2.9% in 2012), along with Medicare premiums paid by recipients, only covers 1/3 of the costs of the Medicare program. As the number of Medicare recipients increases dramatically in the next 25 years, the cost of the program will skyrocket. This is why both Simpson-Bowles and the CBO say we need an additional $2 trillion in deficit reduction, over and above the sequester, just to begin to stabilize the national debt in the next 10 years. After 2023 the problem becomes even worse.
Where is all this needed additional deficit reduction going to come from? We can only shave so much from defense and other discretionary programs. The bulk of spending cuts will have to come from entitlements and this means Medicare and Medicaid. How are we going to implement the big changes which are needed? This is the fiscal crisis we now face and where our national leaders need to focus their attention. First they have to recognize the problem, which many of them do, and then they have to come up with an effective plan to address it and finally they have to implement the plan. Let’s just hope they have what it takes to get the job done!
This screed hit’s the bullseye but fails to provide a solution.
The solution is at least another $2 trillion in deficit reduction over the next ten years, above and beyond the sequester already implemented. This will be very painful to accomplish but is the only way to get the national debt on a downward course as a percentage of GDP.
So you say we need another 2 trillion in deficit reduction in order to deal with a Medicare demographic problem, but you also say that entitlements such as Medicare are the big obstacle to cutting of the deficit. So aren’t you basically saying that Medicare will have to be cut significantly to achieve enough deficit reduction to be able to afford Medicare?
Why the circular argument? Why not just say that old people who become sick will have to forgo medical care because the deficit is more important?
How are we going to shrink the deficit by an additional $2 trillion over ten years (above and beyond the sequester)? It will be very difficult to do this by cutting discretionary spending alone. This means cutting entitlements, i.e. Medicare and Medicaid, because Social Security is mostly already paid for by the payroll tax. Block-granting Medicaid to the states will definitely help because the states operate as efficiently as necessary in order to balance their budgets.
This leaves Medicare. The relatively easy trims are to raise age limits (from 65 to 67 consistent with Social Security) and also increase means testing. Beyond this requires changes in the basic structure of Medicare. One proposal (from Paul Ryan) is to move to a premium support system. An even bigger change (a la David Goldhill) is to reform the entire health insurance system by limiting health insurance to catastrophic coverage give everyone a Health Savings Account. More on this in a future post.