Mario D. Garrett – February 20, 2011
AMERICANS HAVE a looming obligated deficit of $63.6 trillion—a figure which is more than what the Gross Domestic Product (GDP) of the entire world produces ($61.1 trillion), and about four times the GDP of the United States ($14.6 trillion.) This is the largest single debt in the world’s history.
Some blame all or part of this deficit on an aging population, arguing that increasing cost in health care spending, Medicare and Social Security are the main culprits for this obligated debt. Others point to the growing deficits that we build annually into our federal budget, driven by our military spending and pork barrel earmarks. In 2011, we have added an additional $1.6 trillion to the national deficit. If, as some economists predict, our current ailing economy will continue to suffer, then it is imperative to question the legacy that we are leaving our children and grandchildren, and to examine the real reason why we have a deficit and whether an aging population is to blame. This article goes beyond the clichés and the sound bites to expose the underlying dynamics of how aging in America came about and how the obligated deficit has been created. The aging of America exposes a radical and political game changer.
The reality of an aging population is that it has been driven by social factors rather than by people living longer. In the last century (1900-2000) in the United States, life expectancy for 65 year olds has increased by only 5.7 years. This is less then present difference in life expectancy at birth between Whites and Blacks in America—which is 6.3 years. Instead, two of the most important contributing factors to the aging of populations are the decline in births and the decline in infant mortality. These two phenomena go hand-in-hand.
While the decline in infant mortality was orchestrated by improved sanitation, clean water, improved diet and the introduction of immunization—a decline in the birth rate came about as a result of women becoming better educated. Better-educated women have fewer children—because they are either studying/working, they have reduced incentive and opportunity to bear many children—and they tend to have children later in life, with greater lag in-between bearing children. With better education come better personal health practices, more nurturing of infants and consequently better survival through infancy.
Women’s educational attainment in the United States (both high school and college) shot up in the fifties partly due to the GI Bill and increased federal funding for higher education. Beginning after WWII, the nation’s share of female workers rose from less than 25 percent to 38 percent (1970) to 47 percent (2009). The ripple effect from this simple yet dynamic social change is far reaching. The crude birth rate (number of births per 1,000 people) went up at the end of the Second World War peaking at 26 followed by a gradual decline to fewer than 15—which created the baby boom. Over the next six decades these baby boomers started to become older: while the decline in the birth rate continued. So much so that in developed countries, the fertility rate has dipped below replacement level and is still plummeting despite policies in Europe that are attempting to reverse it. This has serious implications as we shall see.
A decline in the number of children means that our labor market will shrink. This is important because we euphemistically refer to Social Security—which also applies to Medicare as well—as a “pay-as-you-go” system. This means that money that workers pay today goes to support the benefits of existing retirees. If we have fewer workers paying into the system, while at the same time experiencing a growing population of beneficiaries, then we have a problem of how to pay these entitlements. In the past we had a surplus with more workers than beneficiaries.
When there was a surplus, the government spent it. For this expenditure, the government prints out treasury special issues—known as trust fund bonds that are not real bonds since they cannot be sold or exchanged. Even the interest on these trust fund bonds are again paid in treasury special issues trust fund bonds. People mistake these bonds as real. Unlike other treasury bonds, these are printed on paper and are filed away in a four-drawer cabinet. However the 2009 Social Security Trustees Report was explicit in explaining that: "Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public." This means that these are not funds or bonds, since to pay this money back the government itself admits that it will have to raise taxes, borrow more, or print additional monies to honor them. The government cannot sell these trust fund bonds on the market because they are worthless. The trust fund bonds are paper IOUs that are valueless unless the government can repay them.
Started by President Reagan—and followed by all other presidents—this newly establish Social Security surplus, was put into the general fund. As a result, each year’s surplus is spent every year. At different times, three members of Congress expressed public outrage at this practice; these were Senators Daniel Patrick Moynihan of NY, Harry Reid of NV, and Ernest Hollings of SC. What was needed was a law to separate these Social Security surpluses away from the budget so that they do not get spent and instead get invested for the benefit of future retirees. This is exactly the law that President Bush signed in 1990. The Budget Enforcement Act—Section 13301—made it illegal for Congress to use Social Security funds by excluding Social Security from all budgets including the congressional budget (taking it “off budget”). However to this day, this law is ignored. If that surplus remained in a fund, then the solvency of Social Security would not be jeopardized. If the fund still existed, Social Security would not have to rely solely on future cohorts. Congress robbed the cookie jar and is now blaming the very people that put the cookies in the jar in the first place.
Congress has not had the ability to stay within budget (apart from 1999 and 2000) and it is unlikely that they will save enough to be capable of honoring the obligation for Social Security which stands at $7.6 trillion, and the obligation for Medicare which stands at $38.1 trillion. More telling is that there is no such budget plan by Congress to ever do so. This year, 2011, our annual Social Security surpluses have disappeared. Not only do we have to contend with a deficit every year—with no surplus money coming from Social Security—but we also have to find money to start paying retirees from sources other than Social Security contributions. The sad part of this story is that we have known this will happen for at least three decades.
The 1982 Greenspan Commission was established to study and make recommendations to Congress on how to solve the Social Security obligations when the baby boomers mature. The recommendation was for a major payroll tax hike to generate Social Security surpluses for the next 30 years, in order to build up a large reserve in the trust fund that could be drawn when the boomers become retirees—now. In effect, the 1982 increases in contributions meant that the baby boomers funded for their eventual retirement as well as funding the benefits of the retirees at the time. This created a massive surplus. A surplus that was designed to fund the eventual retirement benefits of the baby boomers. However, as we have seen, these surpluses were never invested, they were spent.
The other part of this double jeopardy concerns Medicare. Medicare by far is the largest federal obligation, and will overshadow all other budget items within the federal government. By 2007, total spending on health care in the United States was $2.3 trillion or $7,600 per person. The percentage of GDP that is spent on national health is projected to continue to increase (from 5.2 percent in 1960 to 20 percent in 2016), which translates to $4.2 trillion. Rising health care costs are an emergent issue especially for the United States. By comparison, Switzerland, Germany and France allocated around 11 percent of their GDP to health. But despite this enormous outlay of resources on health services in the United States, these dollars do not translate to better health.
While health care costs in the United States are mushrooming—consuming a greater part of our GDP—there exist no comparable improved health outcomes, such as improved life expectancy. The United States continues to slide further behind other countries in health status. In 1997, the U.S. ranked 15th in mortality. Since then, Finland, Portugal, the United Kingdom and Ireland have reduced the rate of preventable deaths more rapidly than the United States. Similarly disappointing are results of child well-being, in which the U.S. ranked second to last when compared to twenty one countries similar to the United States in terms of their economies.
If U.S. health care costs are not contributing to improved health, where are resources going? The United States spends six times more per capita on the administration of the health care system than its peer Western European nations. Moreover, more U.S. health care costs are primarily expended on the dying. During the five-year period 2001–05, nearly a third of total Medicare spending—31.7 percent—went toward the care of moribund patients with severe chronic illness during their last two years of life. It seems that our health system has not learned how to deal with an aging population that naturally dies. And it will continue to ignore the moral, ethical and economic issues as long as other cohorts are footing the bill.
Both Social Security and Medicare surpluses—ostensibly different and separate programs—are comingled in one big trough from which both Democrats and Republicans feed. Some have referred to social security—and, by association, Medicare—as a ponzi scheme. Its viability depends on an intergenerational exchange. Those that contribute into the system today, pay for all benefits of today’s retirees. Implicit in this arrangement is that future contributors into social security would then pay for the current workers when they retire in the future. This intergenerational exchange is more demanding on future cohorts since the proportion of workers to retirees will decrease. Future cohorts will continue to bear a larger and larger responsibility for paying off previous debt.
But future cohorts are changing. The intergenerational exchange becomes an interethnic exchange. By 2050, minorities—those who identify themselves as Hispanic, black, Asian, American Indian, Native Hawaiian, Pacific Islander or mixed race—will account for 54 percent of the U.S. population (currently 34%), which is projected to total 439 million that year. Among the nation’s children, the trend is even more pronounced so that by 2050, this will jump to 62 percent (compared to 44 percent today).
Immigration is playing a leading role in both the growth and changing composition of the U.S. population, points out the Pew Research Center. It finds that immigrants and their descendants will account for 82 percent of the projected population increase from 2005 to 2050. Nearly 20 percent of Americans will be foreign born in 2050, compared with 12 percent in 2005, the center projects. On the other side of the Medicare/Social Security equation, one in five people will be 65 and older by 2050 and 59 percent will be White. While by 2050, there will be 19 million people age 85 and older and 67percent will be White.
So the weight of the Medicare/Social Security burden will be borne primarily by minorities—and immigrants—for the benefit of predominantly White retirees. By the time these younger largely minority cohorts, who have contributed towards the benefits of the emerging baby boomers, get to retire themselves, these benefits will be dramatically reduced since the solvency of Medicare/Social Security can only be achieved by an increase in contributions and/or a decrease in benefits.
This inequity is further exacerbated because of the diminished life expectancy of minorities compared to Whites. Minorities do not receive the same total level of benefits as Whites because they die earlier. Predictions indicated that life expectancy will decline and will primarily affect minorities. There is also a disproportionate level of contribution from minorities because Social Security contribution is capped at $106,800, minorities, on the whole, contribute at the full percentage, while the mainly White—and in smaller numbers, Asian—pay an increasingly smaller percentage the higher their income is above the cap.
The demographics that determine an uneven playing field are dictating that minorities will pay more into Medicare/Social Security—more minority younger cohorts with a higher percentage contribution into Social Security—but they will benefit less due to shorter life expectancy, and smaller individual contributions. But the inequity is that minorities depend on social security to a greater degree than Whites. A much higher percentage of minorities relied on Social Security for all of their income; 33 percent of Blacks and 33 percent of Hispanics, compared with only 16 percent of Whites. The reality of an intergenerational and interethnic exchange becomes more apparent because we need to further promote it to be able to stay economically viable.
We are witnessing a chronically sick economy driven by a narcissistic political system that does not have any long term objectives and which is not held accountable for its excesses. We stand as a nation in a quandary and there are no real solutions come through the densely managed media. As with anyone facing a major health issues, the prognosis calls for radical change. We need to change how we do business, again.
How do we move forward to bring about change? A Bloomberg National Poll of December 2010 reported that three quarters of respondents saw unemployment, jobs, Federal deficit and spending most important issue facing the country right now. As with most terminal diagnosis the prognosis needs to be radical. There is a need for invasive and strategic change in how we are doing business. In order to bring about change we need to start a discussion on issues that elicit visceral reactions in most people. We need to put these on the table and to engage the public to understand these interventions: and then to implement change. Dissent is the voice of change.
• Medicare. We have to deal with health care costs if we are going to be serious about economic reform, and Medicare costs are prime for change. A third of all costs go toward the care of patients during their last two years of life. Although we do not know when some patients will die, we do know which patients prefer to not have invasive interventions. We need to honor people’s wish to die with dignity. Death among frail older adults is not a failure. Physician assisted suicide and voluntary refusal for food and fluids needs to be part of any geriatric program including Medicare.
• Eliminate administration. In business cutting overhead and administration and focusing on the product is what keeps the company competitive. The same needs to be true in our economy. Where there are large administrative bodies such as in education, health, government or military, the role of administration needs to be reexamined. One example is to replace layers of defunct bureaucracy with computer technology. For example, information technology can be used for health care surveillance and monitoring where individual prescriptions can be tracked digitally to reduce the possibility of drug to drug interaction.
• Education for all. The primary engine for the economy and health is education. Educational opportunities should be expanded to ensure that those who have a capacity to learn have the opportunity to do so, and for those with diminished capacity to offer remedial education for life. School needs to be de-centralized with more public education taken on at libraries, adult enrichment centers, community colleges, high schools and work settings. Re-employment funds that will sponsor workers in new jobs for up to a certain number of years, will replace unemployment benefit. This will provide an incentive for the employer to hire more workers, and provide an incentive for the worker to re-train in emerging industries. Being unemployed should never be an option.
• Eliminate insurance companies from Health Care. At least 24% of every healthcare dollar goes toward insurance firms’ administrative expenses and payment processes. The use of computerized technology–including innovative smart card technology, mHealth, telemedicine and other technology driven application to improve healthcare services–would make middlemen insurers unnecessary.
• Separate funds for Social Security and Medicare. Keep the surpluses off budget. Social Security and Medicare are the most successful programs in our history and they have contributed to a more equitable society. Remove the cap on contribution from Social Security (currently at $106,800). Ensure a generous sliding scale so that those who are less needy receive less benefit then those who depend completely on these programs. Allow survivors benefits to only one ex-spouse. Include all workers into the program. Currently some workers can opt out. Make it a national program without any “opting out” options.
• Promote Immigration. Over the long run, a net inflow of immigrants equal to 1% of employment increases income per worker by 0.6% to 0.9%. This implies that total immigration to the United States from 1990 to 2007 was associated with a 6.6% to 9.9% increase in real income per worker. That equals to an increase of about $5,100 in the yearly income of the average U.S. worker in constant 2005 dollars. Such a gain equals 20% to 25% of the total real increase in average yearly income per worker registered in the United States between 1990 and 2007.
As with any terminal diagnosis the remedy might be repugnant, but these interventions are necessary in order to truly change the way we are doing business in America. By definition, changing how we do business needs to be radical in order to be effective, and bring about change. It is a legacy that we need to promote. As with the social factors that brought about the aging of America, we need to change social structure in order to effectively accommodate these changes. By becoming more equitable, we would regain our legacy and we can ensure that we have successfully passed the baton to our more diverse children.
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Mario Garrett is a psychologist and professor at San Diego State University. He has worked at the United Nations International Institute on Aging, and universities in London, Bristol, Bath, Malta, Texas and New Mexico.
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