Age and Dependence: Overestimating the "Burden" of the Elderly

The large "baby boom" generation is now reaching age sixty-five and over the next few decades is expected to place unsustainable demands on our Social Security and Medicare programs. That is what economists, newspapers, and politicians have told us. Lincoln Caplan believes that we are being misled by naive analyses of the issue. He has written an article for The American Scholar titled The Fear Factor. Caplan opens with this lede:

"Long-held predictions of economic chaos as baby boomers grow old are based on formulas that are just plain wrong"

One commonly utilizes a dependency ratio to estimate the effect of an aging population. The elderly are gathered into a bin including everyone over age 65. The number in that bin is divided by the number of people of working age (15-64, as used by Caplan, although the UN uses 20 as the youngest working age and arrives at different numbers. Caplan’s numbers will be used here.) and multiplied by 100. It is assumed that those over 65 must be supported by those of working age. In 2010 this "old-age" dependency factor was about 12. By 2030 it is expected to increase to about 22. The net result is that by this measure the burden on the working population will increase by about 60 percent.

Caplan resents the notion that all people over 65 are a fiscal liability, and believes the utilization of this dependency factor to be grossly inaccurate as a predictor of the impact the generation of boomers will have.

"With an objective formula, it seems to document that those who make up the gray tsunami are a large and growing liability, undermining the country’s assets. The old-age dependency ratio appears to justify the view of alarmists like former Federal Reserve Board Chairman Alan Greenspan, who testified before the Senate that this outsized group of aging Americans ‘makes our Social Security and Medicare programs unsustainable in the long run’."

"A demographic tool has become an economic one, treating a demographic challenge as both an economic crisis and a basis for pessimism justifying drastic reductions in bedrock government programs, including those supporting children and the poor."

To begin with, not all the elderly are dependent on government provided assistance for survival. Only 40 percent of consumption by those receiving benefits from Social Security, Medicare, and Medicaid arises from government transfers. While some are highly dependent, many are much less so.

Medicare is the program most at risk due to the increase in the elderly. It is burdened by an outrageously expensive healthcare system, and the fact that people will eventually become sick and die. However, several analyses that include a more sophisticated approach have concluded that the surge in expenses to Medicare is being overestimated.

Caplan refers to work reported by demographers Warren C. Sanderson and Sergei Scherbov in Science magazine.

"They wrote that chronological age is less useful than life expectancies in predicting national health costs, because ‘most of those costs occur in the last few years of life.’ Sanderson and Scherbov developed a measure they called the adult disability dependency ratio, defined as the number of adults 20 and over with disabilities, divided by the number of adults 20 and over without them. In the United States, this measure will likely remain flat for the next generation, meaning that the cost of caring for the disabled is not likely to skyrocket as a result of a major increase in the number of disabled people."

Another approach taken by the Stanford economist John Shoven was presented by Caplan.

"’Consider two alternative definitions of who is elderly in the population,’ Shoven writes, ‘those who are currently 65 or older and those who have a mortality rate of 1.5 percent or worse.’ In 2007, when he wrote this paper, the two definitions were equal: the average mortality rate was 1.5 percent or worse for 65-year-olds. According to the U.S. Census, the population of those who are 65 or older will increase from about 12.5 percent of the population in 2035 to about 20.5 percent in 2050. But "the percent of the population with mortality risks higher than 1.5 percent (currently also 12.5 percent of the population) never gets above 16.5 percent," because of what James Fries of the Stanford School of Medicine called ‘the compression of morbidity’—the tendency of illnesses to occur during a short period before death if the first serious illness can be postponed. That number ‘is projected to be just slightly below 15 percent and declining by 2050’."

"By the conventional measure of years since birth, the population considered elderly is expected to grow by 64 percent. By Shoven’s measure, on the other hand, it is expected to grow by just 32 percent."

These approaches try to estimate how need for medical care will be distributed throughout the coming years. Another source of potential error is associated with projecting what the cost of that medical care might be. Currently, the rate of Medicare per capita expenditure growth is approaching zero. In each of the last three years the Congressional Budget Office has had to lower its projection of Medicare expenditures. The fact that most senior citizens have modest medical expenses until the near end-of-life period means that projections of costs depend greatly on how society decides to treat healthcare for the terminally ill. The current approach often involves spending large sums on treatments that may add just a few months to life expectancy—a few months that are often painful and unwelcome. A change in how we treat illness for those near death could have a large effect on the economics of Medicare.

Caplan also provides insight into why the Social Security Program is projected to run short of sufficient funds to provide full benefits to its recipients.

"In 2021, the trustees project, Social Security benefits will exceed tax revenues plus interest income and the program will start to draw down its reserves. In 2033, when the last boomers will be turning 69 and the number of Americans on Social Security is projected to double, the reserves are projected to be depleted and tax revenues are projected to cover only 77 percent of benefits due, unless there is a change in revenues or benefits."

This situation is often interpreted as "the nation has promised more than it can deliver." But that is not true. When the last major change to Social Security was made in 1983, the baby boomers were known to exist. The surge in senior citizens could hardly have been a surprise to the planners. Rather, what would have been a surprise was the stagnation of wages and the resultant fall in revenue.

Social Security is designed to provide a greater fraction of preretirement income to those at the lower incomes, and a lesser fraction to those at higher incomes. As incomes increase, there comes a point at which people pay into the system more than they get out of it. Stagnant wages have made it more difficult to support the lower income groups because more people than expected are in the low income groups.

"Robert M. Ball, who was commissioner of Social Security under Presidents Kennedy, Johnson, and Nixon, proposed that the program return to taxing 90 percent of American earnings, the level set in 1983 when Congress last significantly reformed Social Security."

Much of the income gains in recent decades have gone to very high wage earners and have escaped taxation. The 90 percent target has now been replaced by a reality where only 83.5 percent of earnings are taxed.

"….the government sets a cut-off point each year for taxation of earnings based on the amount of average American earnings. In 2014, that number is $117,000. But since high-end earnings have grown faster than the average, today only about 83.5 percent of earnings are taxed. In Ball’s view, the system has been over-protective of high-end earners and ‘a major part of the Social Security shortfall is due to the fact that a higher and higher proportion of earnings is escaping Social Security taxation.’ If 90 percent of earnings were taxed, the maximum would rise to about $217,000. In 2004, when he was 89, Ball wrote, ‘This proposal is not a new policy, but an old one restored’."

Social Security has not made excessive promises; the nature of our economy has changed and society has not yet adjusted to those changes—but it must.

Neither Social Security nor Medicare is an extravagant program that society cannot afford. There is no need to panic.