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 Editorials | February 2008 
The Social Security and Medicare Crisis: Not the Fiscal Catastrophe We Fear?
 Paul Crist - PVNN
Alarm bells have been clanging for three decades over the looming Social Security and Medicare crisis facing the U.S. America is not alone in confronting the issue of an aging population that threatens fiscal calamity, economic devastation, and overwhelmed healthcare systems. Europe, Japan, and China face similar demographic profiles that will demand major changes in the way the world lives and works.
By about 2025, there will be more Americans over 65 than younger than 15, despite higher birthrates among recent Latino immigrants. China will have 400 million older citizens, and some European countries will see nearly half their populations over 60 by mid-century. These demographic trends threaten to bankrupt healthcare systems, overwhelm old-age pension programs and decimate armies as countries’ median ages exceed military age. The future of politics will no longer be a fight between right and left, but between young and old.
But these dire visions of the future need not become fact, at least not if we begin to take a more dynamic approach to how we measure age. Politically, in the U.S. this will take leadership and creativity, considering that up to now, changes to Social Security and Medicare have been met with strong opposition from aging Baby Boomers, while the majority of younger voters doubt they will ever benefit from the taxes they are required to pay into the system. Politicians facing a tough electoral climate therefore do their best to duck the issue, while private economists and government numbers crunchers warn that the only solution is to reduce benefits or raise eligibility ages. The news media has not helped to forge any public understanding or consensus, preferring to highlight the clash of interests on the subject.
We measure age by the number of years since birth, and eligibility for so-called old-age benefits has been based on those numbers. The earliest age at which reduced benefits are payable is 62. Full retirement benefits depend on the retiree’s year of birth, ranging from 65 to 67 years of age. Those who delay retirement up to age 70 receive credits that increase their benefit.
But what was considered “old” when those numbers were agreed to has changed.
When Social Security was designed, 65 years of age was considered to be the age at which a person moved “beyond the productive period” and into dependency. In 1940, a man of 65 years could expect to live another 11 years, and a woman 15 years. Medical advances have radically changed mortality risk. At 65, a man can now expect to live 17 more years. He faces only a 2% risk of mortality at age 65 today.
Measuring age by years since birth for purposes of determining when someone has passed “the productive period” is therefore as sound as using the dollar as a timeless unit of measure. Consider that in 1960, per-capita spending in the U.S. was $1,835. In 2006, per capita spending was $31,200. Does that mean that spending increased 17-fold from 1960 to 2006? Of course it does not. We adjust for inflation, and determine that average per-capita spending has approximately tripled during that time when measured in constant purchasing power. A 1960 dollar and a 2006 dollar are simply two different units of value.
Life expectancies have dramatically increased in other countries facing “the demographic challenge” as well. Chinese life expectancy has increased by 36 years since 1960, South Korean life expectancy by 24 years. Mexicans can now expect to live 17 years longer, and the French have extended life expectancy by a decade. Our conception of what is considered “old” is now outdated worldwide.
Just as we adjust for inflation in measuring economic data, it is time we introduce the idea of “inflation” in how we measure age. Presented this way, based on actuarial expectations of mortality risk, raising retirement age may be much more politically palatable, and can go a long way to solving a looming fiscal and economic crisis.
A recent television commercial for a large investment fund jokingly suggests that “50 is the new 40.” But it really is no joke. The fact is, a 65-year-old man today has the same mortality risk as a 56-year-old man did in 1940, or a 59-year-old man in 1970. In other words, a 65-year-old man today is the same “real age” as a 56-year-old man was in 1940, or a 59-year-old man in 1970. So why should we promote a “real” retirement age of 56 or 59 years?
The implication of adopting an “inflation-adjusted retirement age” is significant. If we replaced the 65 year marker with a 1.5% mortality risk measure that determines who is elderly, a much smaller percentage of the U.S. population will be “past the productive period.” By 2050, 87 million Americans will be over 65 years of age. But only 62.5 million (about 15%) will have a mortality risk above 1.5%. In some countries, notably Japan, Spain, and Italy, the reduction in the percent of the population considered “elderly” would be reduced by as much as 30% at mid-century.
And to be clear, inflation adjusted age measurement does not mean shortening retirements. It will simply stabilize the number of retirement years, which has been growing as life expectancy increases. In the 20th century, the average number of years of retired life grew from 2 years to more than 19 years, dramatically increasing the cost of retirement and old-age benefits. Adjusting “age” as we adjust for inflation will make these costs far more manageable. If the concept and its benefits are presented clearly to the public, explaining that adjustments are not “cuts” in benefits, but merely a logical way to stabilize them, it may be more feasible to achieve national consensus to forestall what will otherwise be economic catastrophe.
Paul Crist lives in Puerto Vallarta, Mexico, where he owns and manages a hotel. He also is a founder and President of a non-profit organization addressing the HIV epidemic in Puerto Vallarta, and writes on a broad range of topics, including economic issues, immigration policy, HIV policy, and more. He holds an MA in International Economics from Johns Hopkins University School of Advanced International Studies, and may be reached for comments at paulcrist(at)hotel-mercurio.com. |
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