Human Limits

I want to get back to issues associated with Medicare in specific and the demographics of aging in general.    Part of the reason for this is that the rate of increase in Medicare spending seems to be slowing a bit and that is leading at least some of our political leaders and commentators to suggest we pay less attention to the long term implications of Medicare spending for the U.S. Federal Budget and economy.   That having been said I want to make a few points that we should all be thinking about in terms of our own retirement planning, our kids and also friends and relatives who are older.

Point 1: The number of workers per retiree continues to drift downward.

The figure below is from the Social Security Administration and it shows both historical data and future projections for the number of workers per retiree.   The magic number here is that over the next 20 years, if nothing changes, this ratio is going to drift downward from about 3.4 to 1 and stabilize at roughly 2 to 1.   Medicare (and also Social Security) is ultimately a pay as you go plan.  So the question is how much can we expect younger workers to pay to cover benefits for older people?   This is especially interesting because for better off older people, we currently have a situation where younger people of modest and limited means are essentially subsidizing a large portion of their health care costs.   Is this a wise policy?  Is it fair?  Is it even ethical?

Point 2:  What Happens After the Baby Boomers are Gone?

I did a little thought exercise with my friend and colleague Bob Smoldt, an extremely experienced medical administrator, who has great expertise about all of the economic aspects of health care.  I asked Bob what is projected to happen after 2045 when about half of the baby boom generation (born between 1946-1964) will likely be dead.   My thinking was that once we are over the demographic hump associated with the baby boom, perhaps the number of beneficiaries would stabilize or drop and the 2 to 1 ratio would get better.  Here is an excerpt of his response:

“What happens after baby boomers are gone?  Does the problem get better?  It is quite interesting.    Here is what the latest Medicare Trustees Report (2012) projects:

Number of Medicare beneficiaries

• 2045 = 88.7 million
• 2055 = 93.3 million
• 2065 = 99.8 million

There is no decrease projected.  I assume this is at least partly because of expected increase in life expectancy.  So if you want to save entitlements by having the Baby Boomers die off — they better do so more quickly……

Ratio of workers (people paying the bill) to beneficiary

• 1970 = 4.6
•  2010 = 3.4
• 2030 = 2.3
• 2085 = 2.1

Workers per beneficiary levels off from 2030 – 2050 and then declines even further to 2.1.  I don’t know why Social Security is different, but they project workers per SS beneficiary going down to 1.9.   I was a bit surprised by this, but there is no magic bullet here. It just keeps getting worse — we will basically be at 2 workers per beneficiary “

Point 3: Potential Solutions.

It seems to me that these statistics are pretty hard to ignore and that sooner or later Medicare is going to have to be reformed.  Here are a couple of ideas about what to do that could be adopted alone or in combination.

• Raise the retirement age.  I have discussed this in detail before and challenged the idea that raising the retirement age is unfair to certain ethnic and socioeconomic subsets of the population with lower life expectancies.   The issue here is largely who makes it to 65 vs. survival after age 65.
• Means test benefits so that well off people get less.   This is an old idea and the link earlier in the post on younger people subsidizing well off older people discusses how this might work and includes adjustments for groups with lower life expectancies.
• The other idea is so-called premium support similar to what members of Congress get.   Here is a comparison of several proposed plans.   This idea has recently been derided as “VoucherCare” by liberal political commentators even though it was originally proposed by liberal think tanks.

Answers From Scandinavia?

Some conservatives love to make inflammatory comments about how President Obama is trying to turn the U.S. in to Western European style social democracy with a cradle to grave welfare state.  I have a different observation; countries like Sweden are in fact reforming their social welfare systems much faster that the U.S. is via things like raising the retirement age and going to defined contribution funding models.   The Swedes for all their alleged liberalism seem to be recognizing demographic reality and dealing with it.  While Sweden changes the U.S. is trapped in a vicious cycle of demographic denial.