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Hullabaloo


Tuesday, December 25, 2012

 
Preparing for Uncle Harry

by digby

When your rich wingnut uncle Harry starts going on about "entitlements" over egg nog today, bring out Dean Baker to explain it to him,  just as he explained it to Fareed Zakaria:

In 1900, 1 in 25 Americans was over the age of 65. In 2030, just 18 years from now, 1 in 5 Americans will be over 65. We will be a nation that looks like Florida. Because we have a large array of programs that provide guaranteed benefits to the elderly, this has huge budgetary implications. In 1960 there were about five working Americans for every retiree. By 2025, there will be just over two workers per retiree. In 1975 Social Security, Medicare and Medicaid made up 25% of federal spending. Today they add up to a whopping 40%. And within a decade, these programs will take up over half of all federal outlays."

Yes, the facts are hard to dispute. That is why those of us on "the American Left" try to use them wherever possible. As Zakaria points out, apparently without noticing, we have already seen most of this aging disaster story. As he says, in 1960 there were about five working Americans for every retiree. Currently the number is less than three. It is projected to fall to around 2 workers per retiree by 2030 or "just over two" if we prefer Zakaria's 2025 date. And the big three programs grew from 25 percent of federal spending to 40 percent between 1975 to 2010, they are projected to rise another 10 percentage points in a decade.

Apparently Zakaria missed it, but this sharp decline in the ratio of workers to retirees did not prevent us on average from enjoying a substantial rise in living standards over this period. Of course the gains were not evenly distributed because of policies that redistributed income to people like Peter Peterson and his friends in the Campaign to Fix the debt (e.g. trade policy, anti-union policies, deregulation of the financial sector -- the fuller story is available here). However per capita after-tax income is more than twice as high today as it was in 1960, in spite of the scourge of a growing elderly population.

The reality known by arithmetic fans everywhere is that even modest gains in productivity growth swamp the impact of demographics. Here is the story for the years from 2012 to 2035, the peak stress of the baby boomers retirement.

Note that even in the most pessimistic productivity story, the slowest rate of productivity growth of the post-war era, the impact of productivity in raising living standards is more than three times as large as the impact of demographics in reducing them. Furthermore, this takes 2035 as an endpoint. After that year there is little projected change in demographics for the rest of the century whereas productivity will continue to grow.

Of course it is worth noting that our broken health care system can impose a serious burden on the economy. We already pay more than twice as much per person for our health care as do people in any other wealthy country with little to show for it in terms of outcomes. If the gap rises to a factor of three or four to one as some projections show, then it will impose a serious problem for the budget and the economy. However the answer is to fix our health care system, not to get angry at people for growing old.

The American Left is very willing to face the facts and look at the arithmetic. Unfortunately Mr. Zakaria and his editors at Time Magazine don't have the same interest.
And when your smartass young business school nephew comes at you with the patented Peterson Institute generational warfare rap about the selfish baby boomers stealing the future, try this one:

[T]he cohorts between the ages of 55 to 64 ... (Wealth typically peaks in these years, so these people are unlikely to have more wealth when they cross age 65.) The median wealth for this group was reported as $162,000... if they were to use this wealth to buy an annuity at age 65, it would be sufficient to get them an annuity of roughly $10,000 a year or just over $800 a month. This would supplement Social Security income that comes to less than $1,200 a month for a typical worker. The monthly premium for Medicare Part B is $100, which would leave $1,100 from a monthly Social Security check for a typical retiree.

Note that this calculation assumes that they have no equity in their home so they would either being paying rent or still paying off a mortgage out of this money. It is also worth remembering that the Medicare premium is projected to rise considerably more than the cost of living each year. This means that as retirees age, rising Medicare premiums will be reducing the buying power of their Social Security check each year. And this is the median; half of all seniors will have less income than this to support themselves.

This is the group that the Very Serious People in Washington want to target for their deficit reduction. While the Very Serious People debate whether people who earn $250,000 a year are actually rich when it comes to restoring the tax rates of the 1990s, they somehow think that seniors with incomes under $30,000 a year must sacrifice to balance the budget. There is a logic here, but it ain't pretty.

I hope you are lucky enough not to have to have this conversation today. Life is short and it's important to just enjoy your family, friends and leisure time if you can. But just in case one of the inevitable blowhards in your life decides to make an issue out of it, you'll be prepared ...










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