Wednesday, December 8, 2010

Dealing with Social Security, Deficits, and an Aging Population

It would seem that just about every country in the world is facing dire economic projections that demand an immediate response. Nations wealthy enough to have problems worth worrying about, all seem to be facing declining birth rates which translates into declining tax revenues and increasing revenue demands. Debt projections extrapolated ahead for a few generations provide enormous national deficits. Douglas J. Besharov and Douglas M. Call have provided a good summary of this process with an article, The Global Budget Race, in the Autumn, 2010 issue of “The Wilson Quarterly.”

They remind us what is at stake here.
“The United States has one of the worst balance sheets, with a projected debt in 2050 of $123 trillion. Of course, what can’t happen won’t happen, as economist Herbert Stein taught us. Long before that point, most countries will get their finances in order—either after a careful analysis of the alternatives or because they will be unable to borrow money and will be forced to take corrective action. How capably they respond will determine their future economic competitiveness and their standard of living.”

“Those countries that do a better job of bringing revenues and spending into balance—in a way that fosters a healthy and productive citizenry—will have a competitive advantage in the global economy, and they may be able to avoid economic decline.”
They provide relevant data to put this problem in perspective.
“The accruing national debts are truly staggering. In a report earlier this year that reflected the catastrophic impact of the recent recession on national balance sheets, the Congressional Budget Office (CBO) estimated that in 2050 the U.S. gross debt will reach about 344 percent of the nation’s gross domestic product (GDP). That’s up from an already alarming estimate of 292 percent before the recession. (State and local liabilities, in the form of unfunded pension and health costs, would add trillions of dollars more.) As of late last year, in 2050 France’s debt was projected to reach 337 percent of GDP, Germany’s 221 percent, and Britain’s 560 percent.”

“The root of the problem is the same in most countries: With populations aging, the intergenerational transfer system that has paid for pensions and health care is breaking down. Low birthrates and longer life spans are changing the balance between workers and retirees so that current levels of taxation cannot support the promised benefits. Across the developed and, increasingly, developing worlds, worker-to-recipient ratios are declining. By 2050, the U.S. Census Bureau estimates, there will be only 2.7 American workers for each retiree, down from 4.7 in 2008. The European Union nations will have only 1.8 workers per retiree, and Japan 1.3. China faces the biggest adjustment, dropping from about 7.7 workers per retiree to 2.1.”
The authors then proceed to perform typical analyses of what one might do to revenues and what effect it might have on deficits. I have found little evidence of people who break out of the box of conventional thinking. Why does the economy of the future have to look like the economy of the past? Given the way things have changed in the last generation, one has to ask why one would even make such an assumption.

Martin Walker discusses demographic trends in an article from last year in The Wilson Quarterly: The World’s New Numbers. He made clear that while demographics change slowly, demographic projections can change dramatically. He also inserted a few comments about future populations that qualified as “bringing a new perspective.”
“.....the total dependency ratios of the 21st century are going to look remarkably similar to those of the 1960s. In the United States, the most onerous year for dependency was 1965, when there were 95 dependents for every 100 adults between the ages of 20 and 64. That occurred because “dependents” includes people both younger and older than working age. By 2002, there were only 49 dependents for every 100 working-age Americans. By 2025 there are projected to be 80, still well below the peak of 1965. The difference is that while most dependents in the 1960s were young, with their working and saving and contributing lives ahead of them, most of the dependents of 2009 are older, with more dependency still to come. But the point is clear: There is nothing outlandish about having almost as many dependents as working adults.”

The burden of the future is equivalent to the burden of the past in the sense of having similar numbers of dependents (non-workers). One has traded retirees for children. Is the burden on society of a child greater or less than that of a retiree? I don’t know, but it certainly is an interesting question. If one assumes that the costs to society are equivalent, then dealing with this change becomes an income redistribution issue. A couple with two incomes and no children is considerably wealthier than a couple with equivalent income and two children. One could foresee a tax structure that provides the appropriate reallocation of funds. People would have to learn that this is a necessary aspect of ensuring security in old age.

Are there other perspectives out there that could be game changers? A few minutes of reflection suggest a few. One of my major concerns involves the ability of economies of the future to provide full employment. Another issue that, to my knowledge, has not been adequately addressed is the impact of global warming and the associated climate changes.

How do you construct an economy where there will always be an arbitrary number of people without jobs? The more developed economies might be there already—one just doesn’t know how bad it is going to get. If one always has unemployed people that must be subsidized by the state, does it make sense to try and save money by raising the retirement age? Does it cost more to subsidize a long-term unemployed person than a retiree? Again, I don’t know. There are many costs associated with long-term unemployment, particularly when there is a family involved, that complicate the issue. My gut instinct tells me we would be better off by encouraging early retirement and making more jobs available.

Having significant numbers of the long-term unemployed is a problem that societies have not learned how to deal with. One could conceive of a healthy, growing economy that leaves say 20% of the population without work. This could be a major problem or it could be a major opportunity. The people who do have work in this economy will be relatively wealthy, assuming a reasonable distribution of income. Couple this with the always needed public sector work and you have a potential solution that demands merely an appropriate income redistribution.

What might be the public sector work that would soak up these excess people? Two come to mind: health care and infrastructure. Consider two major cost drivers of the future. Health care is known to be one. The other is likely to be climate-driven infrastructure modifications.

It seems counter-intuitive to try to provide cheaper and better health care outcomes by throwing more people into the system. It will depend on how you use the people. Studies indicate that one can expect better and less expensive health outcomes by devolving some responsibilities now assumed by doctors to nurses. One could take this a step further and devolve some hospital and doctor office activities to lesser-trained but mobile in-home treatment personnel. The elderly would particularly benefit from lower level but more frequent interactions with medical personnel. A similar approach might be applied to helping the morbidly obese control their lifestyle.

An area that has not been discussed sufficiently is the impact of climate change. We are not discussing end-of-the-world scenarios here. Heidi Cullen, in her book, The Weather of the Future, discusses the impact of what are essentially inevitable changes in climate: changing precipitation patterns, more extreme storms, and more extreme hot spells. These will all require a human response of some kind. She mentions two areas in the United States that would require massive investments in infrastructure. One is in the water distribution system in California, the other is New York City. The investment required for New York to graciously accommodate warmer heat spells, more extreme storms, and rising sea levels is enormous. There could be enough work in the infrastructure arena to soak up any excess in the workforce.

The question is how to pay for the future, whatever it might be. The comments presented above by Martin Walker convince me that our societies are capable of withstanding major changes if the citizens are willing to accept reasonable patterns of wealth distribution, and if they recognize that we are all in this together. If sacrifices have to be made, societies work better if everyone is involved in the sacrifice.

It would be beneficial to have a broader discussion on alternatives, rather than focusing on cutting specific funds in order to address a specific problem. There is no need to be in a hurry to do dumb things. There will be plenty of time for that later.

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