By Carl Tannenbaum

I still think of myself as a young man…until my back creaks getting out of bed and I get a good look at myself in the mirror.  I can turn the clock back a little bit with a mouthful of vitamins and a hot shower, but there is no doubt that I have reached a certain age.

There is some small consolation in knowing that I am not alone.  Around the world, the postwar generation is getting up in years.  As much as we might think ourselves vigorous, we are not as dynamic as we used to be. The collective aging of societies is a significant economic and financial issue.

Developed countries should not be surprised at the demographic challenges that they are now facing.  Wealthier nations tend to see their birth rates drop, as prospective parents stand to lose more income if they take time off to raise children.  Life expectancy extends, thanks to better nutrition and health care. 

In the United States, the Congressional Budget Office estimates a long-term fertility rate (the number of children borne by a woman during her lifetime) of 1.7, below the replacement rate and down from nearly 2.1 fifteen years ago.  Life expectancy at birth in the U.S. is projected to extend to more than 82 years by 2050; at that point, a citizen who reaches age 65 can expect to live for a further 22 years.

The result is an elderly population that is growing more rapidly than the cohort that is still working.   Worker shortages have begun to appear; health and retirement systems are starting to strain.

The retirement system on which most Americans depend is Social Security.  Half of recipients rely on the program for more than half of their monthly income; one quarter of recipients rely on benefits for more than 90% of their monthly income.  The program is critical to curbing indigence among the elderly.

Social Security is not a traditional pension plan in which individuals have their own accounts.  Instead, it is a transfer program: payroll taxes from workers fund benefits for retirees.  For many years, receipts exceeded benefit payments, allowing the accumulation of balances in a trust fund.  But that fund is projected to be exhausted in ten years.  Absent intervention, benefits will be reduced by 23% across the board at that point.

The solvency of Social Security can be restored with adjustments to payroll taxes, retirement ages and/or benefit formulas.  It would be ideal to reform the program without waiting for the last moment, as remedies would be given more time to take effect.  But the timeline and the sensitivity of the debate around Social Security make it unlikely that it will be a priority for the new Congress.

Providing medical coverage for citizens who have completed their working lifetimes is an expensive proposition.  This year, an average of 11,000 Americans per day are celebrating their 65^th birthdays.  At that point, they are eligible for Medicare coverage, and many take that opportunity.  Enrollment in the program is growing rapidly, and will continue doing so over the next decade.

The costs of the program are growing commensurately, rising from 3% of federal spending in 1972 to 12% today.  By the middle of this century, Medicare will represent 18% of the national budget.  An excellent overview of the program’s finances from the Kaiser Foundation can be found here.

Rising enrollment isn’t the only element increasing the costs of Medicare.  Per capita spending in the program has been escalating at a pace of more than 5% per year.  The introduction of new therapies and pharmaceuticals, some of which are very expensive, will add layers of costs to Medicare. For most of us, medical costs peak in the final years of life; that phase still lies ahead for the majority of baby boomers.

The urgency of addressing Medicare is much higher than it is for Social Security.  The costs, and the rate at which they are rising, are far greater.  The Medicare Trust Fund that pays claims for hospitalization insurance will run out of money in the next few years; absent a payroll tax increase to bolster reserves in the fund, providers will eventually face an 11% reduction in reimbursements. That could be enough to put some medical providers out of business.

The menu of options for making Medicare more sustainable is a long one.  Recalibrating reimbursement rates, updating premiums and deductibles, and more extensive case management are among the broad categories to be considered.  All of these are very intricate, and all of them are surrounded by fierce debate and lobbying.   

Make no mistake: it is a good thing when people live longer.  But if economies have not prepared for that outcome, they can struggle.  Shrinking labor forces hinder output and raise inflation. Substantial fractions of national budgets must be devoted to old age support, raising debt and limiting the resources that can be invested for the future.

To deal with our demographics, the United States will have to adopt sound policies.  Immigration must be given a fair hearing as an avenue to better demographic balance.  Our Social Security system must balance revenue, retirement ages and benefit levels to remain solvent.  Medical systems must optimize the length and quality of life at a cost that does not place undue burdens on old or young.  Unfortunately, neither Republicans nor Democrats have advanced clear agendas for addressing the aging of America.

Much as I might wish it were possible, there is no way to return to my salad days.  The best that I can do, and societies can do, is accept everything that comes along with aging and make the best of it.  That mindset will be essential to making our golden years golden.