StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



The Politics of an Aging Population

23 May 2010
Posted by Bruce Bartlett

The Census Bureau has just issued a new report on the rapid aging of the U.S. population. There's a lot of good data and graphs in it, but I want to focus on just one implication right now: the political impact of an aging society.

First let's look at the data. According to Census, 27.1 percent of the population is currently under age 20, 59.9 percent is between 20 and 64, and 13.0 percent is 65 or older. By 2020, the under-65 share will fall by 3.1 percent and the 65 and over share will rise to 16.1 percent of the population. In raw numbers, the number of those 65 or over will rise by 14.5 million persons.

Now let's look at a second new Census report on voting in the 2008 election. It shows that voting is highly correlated with age: the older one is the more likely that person votes, as shown in the following table.

Voting by Age, 2008

Age/years
Percent Voting
18 – 24
48.5
25 – 34
57.0
35 – 44
62.8
45 – 54
67.4
55 – 64
71.5
65 – 74
72.4
75+
67.8

The Census Bureau estimates that the odds that someone voted were twice as high for someone aged 45 to 64 as for someone 18 to 24, and more than three times as high for someone 65 or older.

In short, what we see is that over the next ten years the percentage of the population that benefits from Social Security and Medicare is going to rise significantly and that this group of the population votes in higher percentages than those that pay for these programs. And those that will, over their lifetimes, bear the heaviest burden of paying for entitlement programs--the young--vote at the lowest rate of any age group.

I bring this up because so many right-wingers seem to think it will be a simple matter to slash or even abolish major entitlement programs into order to restore fiscal stability. Rep. Paul Ryan, for example, would essentially abolish Medicare by turning it into a voucher program and reducing spending for these vouchers substantially below the per capita cost of Medicare, as well as indexing increases in the voucher to well below the historical rate of medical price inflation. He just assumes that somehow or other the market will adjust to prevent a massive reduction in the quality of medical care for the elderly.

I don't want to debate whether slashing entitlements is a good idea or the merits of Rep. Ryan's plan. I just want to know where supporters of such policies think the votes are going to come from? It's hard enough already to cut programs like Medicare when the percentage of the population benefiting from them is lower than it will be in coming years. And as we know, the self-proclaimed party of fiscal responsibility increased Medicare spending by trillions of dollars in 2003 without paying for a penny of it, and more recently opposed any cuts in Medicare to pay for health care reform. Even Senate hopeful Rand Paul, darling of the tea party crowd and self-described libertarian, favors a big increase in payments to doctors who treat Medicare patients.

In short, there is virtually no chance that Congress is ever going to very substantially cut elderly entitlements and none whatsoever that it is going to abolish Medicare as Rep. Ryan proposes. While as a simple matter of math spending for Medicare will have to be restrained since it is rising faster than GDP, the sort of radical cuts or quasi-privatization that right-wingers favor is politically impossible now and will become even more politically impossible when a higher percentage of voters are on Medicare.

If this is the case, then there are really only two options: slash non-entitlement spending on things like national defense or raise taxes. The option of doing nothing and just pushing the costs off onto our children, grandchildren and great grandchildren by running deficits and raising the debt/GDP ratio--which is what we are doing now--will at some point no longer be an option. Financial markets will see to that, as they are now doing in Europe. And every day we wait to deal with our own fiscal problems the political difficulty increases because the voting power of those that will suffer from cuts in Medicare is rising and the magnitude of the necessary cuts is getting bigger by the day.

Generation X

As a member of Generation X it is so frustrating to know that I am screwed. I advise all of my younger clients that they need to save as much as possible no matter how high their income might be now because things will get a lot worse going forward.

The problems that we have going forward are undeniable and yet nothing gets done.

Even more frustrating because I'm a republican and it used to be being a republican stood for fiscal responsibility.

Going off topic but to me the defining moment of this whole problem goes back to the George W Bush/Gore debates when Bush kept saying( paraphrasing ) that the people deserved to get some of their money back.

Well that's all well and good but what about the national debt ? Right then I knew we were going to be in trouble. And here we are 10 years later and no answers to the same problems from either side of the aisle


The only hope your generation has

is that my generation is generous in leaving inheritances to yours. But I suspect that won't happen because the baby boomers are going to live a long time and run through all of their assets. 


Actually not even that is

Actually not even that is going to happen (Baby boomers leave inheritances). One, because the Xers parents are largely not the Boomers, and two, Boomers don't have a lot of assets to leave behind them. I have some (private) studies which looked at Boomer assets, and other than Pensions there's not a lot. Oh except maybe some still overprices real estate they hope to sell off to the rest of us at an inflated price.

I'm a leading Xer also, and it's true, the Boomers really screwed it up for the rest of us.


The Big Lie

That is the central fallacy of the last 30 years, that we could have a "small government" and pay less taxes. If that was anything more than empty rhetoric, right-wingers would have cut spending and THEN given the surplus back as tax cuts. Instead they gave deficit-funded tax cuts and increased spending even when in complete control of government.

Small government is a meaningless campaign slogan. What we all want is a more efficient government that spends wisely. Unfortunately, we have no debate about what 'wisely' means and Americans are so innumerate and misinformed that they think we can balance the budget, fight 2 wars, and cut taxes if we would just cut the pay for federal employees http://www.frumforum.com/kudlows-math . This maes rational debate impossible.


I'd like to think there's a

I'd like to think there's a third option -- in addition to slashing non-entitlement spending and raising taxes. That would be making our health care delivery system more cost-effective. That might be like hoping for the tooth fairy (especially starting from where we are now), but other countries seem to get by with substantially smaller health care budgets. This is bound to be an area that gets debated and re-debated for the next 10 - 15 years, because the amounts involved are just so huge.


That's the Obama strategy.

I hope it works, but I am not optimistic. 


But wouldn't you agree the

But wouldn't you agree the first option we should try is to expand Medicare to the public at large (or something similar) to increase Medicare's inflows and then allow Medicare to negotiate with the pharmaceutical companies. That could get us all the way there or perhaps just a good portion of the way there.

Also, none of what you say matters to the GOP. Policy is not the point for them. Power is the point. If you have the power of government your people can draw off it for millions or set the regulations that will allow them to draw off others for billions.


Potential Savings

I posted this previously, but it is more relevant here.

I haven't seen anyone do the math but the potential savings are astronomical. We pay over $6,000 per capita for health care, France and most developed countries pay about $3,000 per capita for a $3,000 per capita annual savings. For the U.S. population of over 300 million, that comes out to $900 BILLION a year in potential savings. That would balance our budget pretty fast and the French health care system is by most measures better than ours so there is little downside if done right.

While we were having the stupid debate about whether 'government run' health care will create death panels, no one ever asked the public if they would be willing to accept a single-payer plan in return for $3,000 a year.


Often overlooked about senior political demographics...

Yes, seniors vote more often, and receive more benefits to defend (not coincidence) than do the younger generations. That's noted frequently enough.

But it's a lot less often noted that seniors also pay the most taxes, as they are wealthier and have higher incomes than the younger (in real time both Social Security and Medicare are on the whole poorer-pay-to-richer transfer programs).

And seniors in their political activism are also exceptionally sensitive and resistant to tax increases on their fixed income (even when it is not so fixed) from pensions, IRAs, properties, lifetime investment savings, et al.

They know their self-interest on the tax side just as on the benefit side, and are just as politically persuasive about it. Why wouldn't they be? And the big tax increases needed to keep these entitlement programs intact are going to land disproportionately on them.

Which raises an interesting paradox: If it is so impossible to impose benefits cuts that seniors don't want, how is it supposed to be so easy to impose tax increases that they don't want?

For perspective let's consider some real numbers as per CBO. To keep Social Security and Medicare whole will require a projected 50% across-the-board income tax increase by 2030 (to service the SS Trust Fund as well as pay for Medicare benefits, etc). That's a 50% income tax increase on seniors' pensions, IRAs, life savings, even Social Security benefits(!).

How happy are seniors going to be to pay that biggest-in-history tax increase for nothing, zero increase in benefits? For the upper middle class that will be the exact equivalent of a whopping big reduction in benefits -- but we're assuming their benefits can't be reduced! Something has got to give.

Enter the "median voter theorem", or in plain English, millions of seniors saying: "WTF should I pay a huge tax increase so that Bill Gates, all the millionaires in the country, and everyone else richer than me can get their benefits protected 100%, while I get clobbered??" In other words: means testing.

Who's going to object? "The rich" who get means tested out of benefits? Hardly, why would they want to pay a 50% tax increase on all their rich-people's income to preserve their relatively piddling Social Security benefits? So the middle class and the rich agree -- it is in the self-interest of both of them to significantly cut benefits via means testing from the top down.

I just want to know where supporters of such policies think the votes are going to come from?

In no small part from seniors and their self-interest. From there, if seniors agree to reduce tax increases by cutting benefits, who's going to oppose them and want that full 50% tax increase? Young workers raising families decades away from benefit age? Corporations? Labor unions that revolted against even the piddling "Cadillac tax" for Obamacare?

Look at the self-interest of everybody. Who won't support cutting benefits via means testing? (Will the political left rise up and demand: "Increase taxes on the working man to protect the benefits of the rich!"?)

there is virtually no chance that Congress is ever going to very substantially cut elderly entitlements

But it already has. Social Security benefits were cut substantially in 1983, to the point where the Trustess say workers who were young then and later generations will get back $16 trillion less from SS than they contribute to it, compared to prior generations getting back $16 trillion more (the cut also about half due to the tax increase then). A $32 trillion swing is pretty substantial in my book.

And the major benefit cut was not the gradual delay in the retirement age but the immediately imposed means test of making benefits subject to tax at progressive rates -- with the tax paid not to the Treasury as all other taxes are, but remitted instead to the Social Security Administration. This reduces the net benefit received from SS progressively, as income rises. Say: "means test", if carefully disguised to look like something else -- and one who reads the history section at SSA.gov one will see the members of the 1983 Commission knew it.

Then Clinton toughened this up by increasing the taxable portion of SS benefits to 85% from 50% -- but more than that, the income threshold for taxation of benefits has never been indexed for inflation, so more and more benefits are taxed back to the SSA and net benefits from SSA are reduced, more and more, year after year.

There's been a lot of talk lately about "congnitive economics", how they way things are framed affects whether people understand them, and this is a wonderful example. For all the long-time belief that Social Security is "the third rail of politics", virtually nobody realizes that SS benefits have actually been subject to a steadily tightening means test that has been reducing benefits steadily for near 30 years, saving the SSA many billions of dollars ... but I digress.

Any way one looks at it, that is a heck of net reduction in SS benefits. So major entitlement reductions not only are possible but have been done.

It's easy to say: "It's just impossible to cut entitlement benefits" today, when there is no immediate cost to not cutting them, no big tax hike is being presented as the unavoidable alternative. But that is short-sighted and unimaginative.

When it is "entitlement cuts *or else* big tax increases, including on seniors", it is going to be a whole different world. That *or else* got significant benefit cuts in SS in 1983, and it is going to produce the same result again. Politically, nothing else is possible.

Realizing that benefit cuts not only are possible but will be essential to any political compromise that resolves the fiscal problem -- as they were in 1983 -- we should be drawing up and analyzing possible cuts just as energetically as we are new tax options.

For instance, how about the "radical" notion of applying the same rules used for SS to Medicare: Retirement age increased to 67, benefits included in taxable income (and remitted back to Medicare) up to a threshold. How much would that save?

As an aside, don't anyone think a VAT instead of a 50% income tax increase would resolve the incentive problems above. The AARPers hate a VAT as much as an income tax increase, or even more so: They see it as a double tax aimed right at them -- first they spend their whole lives saving after-tax income, then when they retire they get hit with another big new tax when they spend their savings, which otherwise would finally be tax free (they have a point here) to pay for their benefits that they believe they already paid for.

And if we are assuming it is impossible to defy the will of the AARPers ....


Health Care

Interesting comments, but I disagree with the continual lumping of SS and Medicare that is found throughout the media. What we really have is a health care problem. SS has relatively small fiscal challenges. Thanks to the 1983 tax increases the boomers have both funded their parents SS and pre-funded their own SS.

The fact that Bush ridiculed the lock-box and then squandered the SS trust fund on unnecessary tax cuts for the rich and a counterproductive war is a general fund problem, we can solve that using any available combination of tax increases or spending cuts.

If we cut SS benefits to pay back the Bush tax cuts, we should at least recognize that it is an unprecedented transfer of wealth from workers to the wealthy and a betrayal of the promises made in 1983.


Why not raise the eligibility age?

Something I've been wondering about - why isn't anyone proposing to raise the age of eligibility for SocSec and Medicare?


Retirement age

The age for SS is already rising to 67. But this doesn't actually save any money for the government because benefits are actuarially adjusted so that one theoretically gets the same lifetime benefits whether one retires at 62 or 70. Raising the age of eligibility for Medicare would help, but spending per beneficiary is pretty low in the early years so the budgetary savings of raising the Medicare age are not as great as one would think.


Not true.

The age for SS is already rising to 67. But this doesn't actually save any money for the government because benefits are actuarially adjusted so that one theoretically gets the same lifetime benefits whether one retires at 62 or 70.

Not true. The 1983 law increases the "normal retirment age" for an unreduced benefit (the primary insurance amount on one's 35 years of highest earnings) from 65 to 67.

Individuals have the right to start taking benefits as early as age 62 or as late as age 70 -- and a person who starts taking benefits earlier or later than his/her own normal retirement age will have them adjusted in size to maintain their expected total amount.

But the increase of the normal retirement age itself is a straight and unambiguous benefit cut, applied by age cohort.

I.e., two persons with identical earnings records and primary insurance amounts (identical monthly unreduced benefits) have different normal retirement ages. The person with the later normal retirment age must wait correspondingly longer to start collecting the benefit -- that's a plain benefit reduction. If they both decide to take early benefits at age 62, the one with the later retirement age will receive a monthly payment that is smaller (reduced by more) than the other.

I mean, c'mon. Don't get so wedded to the belief that benefits can't be reduced as to deny the reality of benefit cuts that have already occurred.


Actuarial adjustment

That's not right. If you and I were born the same year and had the same earnings history and you start drawing SS benefits at 62 and I wait until 67 or 70, we should still both get the same lifetime SS benefits. Keep in mind also that there is a delayed retirement credit that raises benefits past the normal retirement age for those who wait to draw benefits. See these calculators:

http://www.socialsecurity.gov/retire2/agereduction.htm

http://www.socialsecurity.gov/retire2/delayret.htm

The problem is that in effect early retirement is the normal age of retirement. Something like 70% of people turning 62 start drawing SS benefits immediately. So what the hell good would it do to raise the normal retirement age? Unless the benefit structure was changed radically, it would make no difference to SS's long term finances.


I thought the simple answer

I thought the simple answer for SS was to modestly raise the limit on payroll taxes, currently at a measly $106,800, indexed for base wage growth but only if SS payments are similarly indexed. There is no such cap on Medicare taxes however, so the U.S. going to have to attack the costs just as other countries have. I'm 54 and can see the handwriting (hand wringing, actually) on the wall - I can't afford to retire in the U.S. Fortunately I discovered Thailand, a retiree's paradise.


The real problem isn't the

The real problem isn't the tax rate, but rather the lack of quality high paying jobs with decent income to tax. When everyone is gainfully employed there's plenty of income to tax, but these jobs have been gradually disappearing for several decades. I'm a 5 year old electrical engineer and finding quality work is getting tougher and tougher. It's partly very real age discrimination (read salary discrimination, principally) and the rather dramatic lowering of our standard of living from globalization - the flattening of wage standards from essentially slave labor in places like China. We can't have first world benefits and a social safety net with 2nd world income levels. Obama needs to concentrate on leveling the playing field with China, et al, ASAP, through a combination of changes in currency policy, tax incentives for U.S. based corporations to manufacture stateside, and a robust industrial policy to compete head on with other countries who make no apologies for helping their citizens to grow and prosper.


Young, aren't you?

That is the solution to Social Security, to make 5-year olds work! ;-)

You are right, though, it is the lack of decent jobs that is the real problem, not Social Security. Even though productivity has been rising, it hasn't benefited the average wage-slave.


Another proposal: reverse retirement age

I grew up in a region (Western North Carolina) that catered to retirees, so I've long been worried about the aging population.

For cultural reasons, I think the Republicans are stuck being the defenders of senior citizens, while Democrats have much more flexibility. While seniors are powerful in a few states (Pennsylvania, Florida), the increase in the number majority-minority states will help Democrats win elections without senior support.

Here's my proposal: Rather than raise the retirement age, why not cap the benefits after someone reaches a certain age?

So, the government guarantees you benefits from when you retire (which for most people would be age 67) to 80, at which point the government begins means-testing, both for Social Security and Medicare. Richer people tend to live longer, and if the formula is designed right, people will be much more responsible about their end-of-life decisions. This change might even provide enough money to offer a benefit for working parents--like more help with childcare costs--so it could pass the Congress.

If this isn't enough, we could also use the estate tax to shore up gaps in Medicare and Social Security. This still might not provide enough revenue, but at least it forces the aging population to pay for their own expenses. Again, the young generation--made up of immigrants, African-Americans and others who don't benefit from inheritance--would not be opposed to this.

Already, there's a large, new generational divide between the two parties, and it will only grow if the Republicans refuse to engage with proposes to introduce new taxes or cut the benefits for the elderly. Once Democrats can slough off their elderly voters, they'll be able to call for an intragenerational politics (instead of the intergenerational politics we have now), one that could result in proposals like the one I've outlined here.


Means testing is something

Means testing is something that should be a part of the solution, however when it has been considered in the past, the issue becomse it implies social security becomes an "old-age welfare" program. boo-hoo-hoo is what i say, but i only have one vote.


VAT is one of the few options

I really hate paying taxes, but its clear to me we need to increase collections and that a VAT would be the cleanest way to do it. It would collect from those who currently pay little and if it was applied to things we import (like cars, cloths and energy) it would reduce the over dependency on taxing our manufacturers. It also would be an effective way to tax seniors.

I could agree to the VAT if convinced we would also put into place some needed reforms and caps. For example, gradually increasing retirement age and raising the wage cap for SSI. We also should end talk of giving SSI raise when the inflation statistics say not to, or paying more for the Doughnut on Part D. While we are at it how about ending the wars in Afganastan. In short, you can tax me only if you start spending more prudently!


Getting Tiresome

Bruce,

I have to say that you are becoming a one note wonder in always slamming unrealistic Republican proposals while letting president Obama and the Democrats slide by. The only actually policy event of the last two years that makes any claim on Medicare is Obamacare with it's pie in the sky promise of future cuts to balance the costs the new healthcare entitlement. I'll wager you that these cuts never transpire. Any honest political commentator would have demanded that reductions in Medicare be implemented first as an expression of fiscal and political good faith. I didn't see you make that case.

By the way, loved Impostor, understand your frustration with Republican posturing, but you seem to have become obsessed with your criticism of conservatives. I think you are beating a dead horse and should turn more of your attention to the current powers that be.


Democrats

If you are only interested in reading about how horrible the Democrats are and how wonderful the Republicans are I suggest that this is not the blog for you. I suggest you read National Review, the Weekly Standard, the Wall Street Journal editorial page, the Fox News web site etc. You will never read a positive word about Democrats on those sites or a negative word about Republicans. 


Pox on Both

I'm hardly interested in the conservative spin journals that shill for Republicans for a living. But I do think you've given the Democrats and the left a bit of a free pass. Just because you're disgusted with the right shouldn't lead you to be soft on the left.


Won't the problem eventually

Won't the problem eventually take care of itself? I mean, the Baby Boomers like to think they will live forever, but they will not. Won't the demographic bulge eventually level out?


Longevity

There is good reason to believe that current estimates of longevity embedded in our long-term budget forecasts are much too low. According to a recent academic study, longevity will likely be between 3.1 years and 7.9 years higher than Social Security actuaries are estimating. This will add between $3.2 trillion and $8.3 trillion to its long term liabilities. 

Source: S. Jay Olshansky, Dana P. Goldman, Yuhui Zheng and John W. Rowe, "Aging in America in the Twenty-First Century: Demographic Forecasts from the Macarthur Foundation Research Network on an Aging Society," Milbank Quarterly, vol. 87, no. 4 (December 2009): 842-62.


Maybe

That is interesting, especially since I have seen elsewhere that the SS admin is overestimating mortality declines (as well as underestimating immigration and productivity increases). The 2003 Technical Panel for the SS does suggest that they are underestimating mortality declines, but are overestimating immigration: the net effects cancel out. In any event, the differences between the low-cost and intermediate projections are more significant.


Longevity

I'll let the experts figure it out. But I have to say from observation of others in my age bracket (late '50s/early 60s), they all seem to be in a lot better health than my parents' generation was at the same point in their lives. My parents' generation all smoked, never worked out, gave little thought to their diet, ignored problems such as high blood pressure, high cholesterol etc. My peers may not be doing as much for their health as they should, but they are all doing much more than our parents did.


Frame it as Patriotism

As usual, you are right on target Bruce. The problem is real, and the solutions are politically extremely difficult. The Republicans are not willing to take any risk on backing or even tacitly accepting solutions that don't come while they are in office. And once in office, they have shown no willingness in over 20 years to address the big problems, only cutting NEH grants and piffle like that.

My suggestion is to frame these necessary changes in terms of both national security (not military per se) and "patriotism". We need to develop a rhetoric that is "patriotic" to go for operations only that are totally medically unavoidable once you are on Medicare. It is a matter of "patriotism" to to "sponsor a soldier" by not cashing your social security check (i.e. turn down the benefits) if you are a top-bracket filer. Top-bracket filers with unemployed children over 25 could agree to pay their kids' unemployment benefits for them (or otherwise agree that those kids should not collect from taxpayers). HHS could create a category of "Doctor-Patriots" and "Patriotic Hospitals" who agree to reduced reimbursement rates once certain annual financial metrics have been hit for them. "Look for the Patriot Label!" That kind of thing. It may be hokey, a little creepy and Soviet sounding, but some kind of means testing of Government disbursements needs to be re-encouraged, and I'd like to think that it could be done by social forces rather than purely by legislation. That will take political leadership and is hardly risk free for a politician. But the whole concept of naked interest-group political economics needs to be pushed back and framed as national suicide if we are ever to get out of the fiscal mess we are in.

Americans used to realize that over their lives, they would be young, then adult, then middle aged, and then old, and would go through times rich and poor, and hence looked for a holistic approach to taxation and spending. Over the last 30-40 years the AARP and so on have taught people that it is acceptable to vote for the immediate self-interest. Surely that is a bad development? "Patriotic sacrifice" could be a narrative to try and start to move back to more long-term values in a way that many people could get behind. Or I could be dreaming and we are just going to default, hurting savers like me and all those Republicans with inherited "wealth" in Treasury securities that become like those 19th century railroad stock certificates we see on our brokers' walls.


Kind of obvious

Nice to see that some people have noticed that the political power of seniors will stop any reduction in benefits. I have been saying this for years, but most folks are too fixated on the shortfall headlines to consider the political aspects.

Of course, I still don't believe it is a problem, supply and demand will draw seniors back into the workforce. S&D would have more effect if benefits were reduced, but it isn't a necessary condition.


Simplify

I think we could get major tax changes through if politicians were really willing to overhaul the tax code and make it simple, clear, and progressive. Get rid of all the deductions and loopholes. Just report your income (including capital gains) and look up the rate in a table. Make it truly progressive on the top end, currently the very wealthy actually pay a lower percentage than the simply wealthy. make more top brackets and eliminate the loopholes. This would be a political goldmine and could increase revenues without adding an unbearable burden to the middle class.

of course, this won't happen because most lobbyists just exist to find new and creative ways to exploit the current tax code.


Incentives & Voting bloc sizes

Bruce,

Two questions/points. 1) How large will GenX be relative to the Boomers? 2) Why won't GenX increase their propensity to vote?


some more on the seniors

After a bit of extra pondering, I'll have to agree with you completely. Moreover, here's an article that also reveals the ugly truth for our seniors (here's a link if you'd like to take a look: http://www.pressdisplay.com/pressdisplay/showlink.aspx?bookmarkid=KXOCX4...)

Thanks for posting!




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