Redefining the Challenge
Table of Contents
The fact that America is aging is well established, although its consequences are often exaggerated. The view that unfavorable demographics will lead inevitably to a fiscal disaster later in this century, while it has gained currency in some policy circles, is overly simplistic. It is not a given that entitlements will constitute an unaffordable burden on American taxpayers. The Congressional Budget Office (CBO) has projected scenarios in which entitlement growth is manageable without severe economic consequences.1 Although the future costs of entitlement programs should not be underestimated, we must first recognize the beneficial impact such programs have on the quality of life for older Americans, including reduced poverty and better health. Moreover, these programs convey benefits to family members who otherwise would be obliged to provide more of their own resources to assist older relatives.
Although the future costs of entitlement programs should not be underestimated, we must first recognize the beneficial impact such programs have on the quality of life for older Americans, including better health and reduced poverty.
The controversy over entitlement spending and its effect on the economy has focused almost exclusively on projected costs with little attention given to the profound beneficial impact these programs have had over decades or the importance of sustaining them. While the question often asked is "are entitlements affordable?," the question really ought to be how can we afford not to sustain the monumental contributions these programs have made to the health and well-being of America’s aged population? Social Security, Medicare, and Medicaid have truly forged a revolution in the quality of life of America’s older adults.
Despite the important and beneficial changes made possible by the key social insurance entitlement programs, there is no denying that future projections, especially for health care spending, are daunting and cannot be ignored. America is growing older. The life expectancy of a child born in 2000 is about 30 years longer than that of one born a century ago. Between 2002 and 2030, the older population will more than double, from 35.6 million to 71.5 million, and almost one in five people will be 65 or older.2 Today, the average person in the United States who reaches age 65 can expect to live for an additional 18 years, or six years longer than people age 65 in 1940.3
There is no reason to assume, however, that the aging of society will lead to an economic train wreck. Declining fertility rates, longer life expectancy, and aging of the baby boomers are among the factors that contribute to the long-term aging of the population. The margin of error in demographic projections, although sometimes ignored, is in reality substantial. Furthermore, there are important disagreements about future fertility and mortality rates and population projections, as well as disagreement on what the statistics really mean for our society, especially when it comes to their effect on the affordability of our entitlement programs.
The pessimistic projections often cited to warn of impending doom brought on by the aging of the boomers typically examine the old-age dependency ratio to show the declining numbers of workers available to support the retired population in the years to come. Less frequently noted is the fact that total dependency ratios today are lower than they were in 1950, and are headed still lower until 2010.4 When they do rise again by 2080, they will still be below the ratio reached in 1965 (see Figure 2).
In 2004, Federal Reserve Board Chairman Alan Greenspan, warning that entitlement costs will soar as the boomers begin to reach retirement age, told Congress that it might have to reduce Social Security and Medicare benefits or at least stabilize the ratio between the years spent in retirement with the years spent working.5 David M. Walker, Comptroller General of the Government Accountability Office (GAO), appearing before the U.S. Senate Special Committee on Aging said, "As the share of the population 65 and over climbs, federal spending on the elderly will absorb a larger and ultimately unsustainable share of the federal budget and economic resources."6 Walker expanded on his views in a subsequent speech at the National Press Club: "The United States faces a long-term deficit that will only increase as the baby boomers retire. The resulting fiscal imbalance will test the nation’s spending and tax policies," he predicted.
"Particularly troubling are the many big-ticket items that taxpayers will eventually have to reckon with, including Social Security, Medicare, Medicaid, civilian and military retirement and health care benefits, and veterans’ medical care." According to Walker, "the long-term projected [fiscal] gap is now so large that we will not be able simply to grow our way out of the problem. Difficult choices are inevitable."7
While these and other experts have generally lumped the "big three entitlements" together as sources of budgetary pressure, Social Security and other retirement programs represent rather minor fiscal problems compared to the health programs. Social Security and pension entitlements have been quite stable for the past two decades as a percentage of Gross Domestic Product (GDP), whereas Medicare and Medicaid combined have had a steep upward climb relative to GDP since their creation. At the same time, it is important to recognize that the challenges Medicare and Medicaid face are not unique—they are merely part of a national system of health care whose costs have proven difficult to contain.
Increases in the cost of health care and, in particular, prescription drugs are arguably the biggest problems the country faces with regard to managing the cost of entitlement programs. The U.S. health care system needs to be transformed to ensure access to more affordable, higher quality care. This should be America’s highest priority.
The cost of health care is staggering. In 1970, America (including the government, insurers, employers, and individuals) spent $73 billion on health care. By 2003, the figure had topped $1.6 trillion.8 These costs continue to consume an increasing share of both national income and the economic resources of American families. From 2002 to 2003, costs rose at a rate that was almost three percentage points more than the rate of growth of GDP, and not surprisingly, represented an ever-larger piece of the GDP pie, up from 14.1 percent in 2001 to 14.9 percent in 2002 and to 15.3 percent in 2003.9
Individuals, private enterprise, and government at all levels are affected by these costs, and all are struggling to cope with them. For example, many employers are cutting their own contributions to health care costs and shifting them to employees and retirees—a trend that is likely to continue.
Likewise, nearly 45 million Americans reported being uninsured throughout 2003 and millions more lacked coverage for shorter time periods.10 Moreover, eight out of ten uninsured people are members of working families. According to the Institute of Medicine (IOM), "The lack of insurance negatively affects not only the uninsured, but their families, the communities in which they live, and the country as a whole."11
Our national challenge is to improve the quality of people’s lives by finding ways to keep America’s Social Security, pension, health and long-term care, and other entitlement programs viable and affordable. AARP believes we can respond to this challenge without compromising the integrity of these programs. But, it is essential to achieve some common understanding about the current situation. Reimagining America proposes strategies that will enable America to meet tomorrow’s obligations to all its citizens and create a society in which everyone can age with independence, dignity, and purpose.