- The Washington Times - Sunday, December 25, 2005

First of five parts

Those who love Florida can take heart — a piece of the state soon will be coming to you.

In the next 25 years, the baby boomers will retire and the rest of the country will mirror Florida, where 20 percent of the population is 65 or older.

The first of 78.2 million boomers — defined as those born from 1946 to 1964 — turn 60 next year. They’ll become eligible for Medicare and full retirement under Social Security five years later. Some will begin to take early retirement under Social Security in just two years.

They fundamentally will alter the marketplace. Consultants specialize in advising companies how to market to the boomers and their $2 trillion in spending power. First Bob Dylan, 64, pitched Victoria’s Secret lingerie; now Paul McCartney, 63, sells Lexus luxury cars.

Long-term health care facilities expect a surge in demand, and morticians say their field will face a shortage as boomers die.

On the whole, boomers will be better off than any other retired generation in history. They are far better-educated, more technology-savvy and living healthier into their later years. They will have higher retirement incomes and a lower poverty rate.

Call it — or them — the new gray.

Their younger and older countrymen can only hope to fare as well, as politicians and interest groups grapple with fundamental questions about policy promises and how to pay the bills.

“We have a tremendous demographic tsunami descending on us, and we have to start preparing now,” says Paul Hodge, director of the Global Generations Policy Initiative at Harvard University. “American government, American society will be forced to make hard decisions. I think it will start in five years. There are going to have to be trade-offs.”

In other words, there are going to be some ch-ch-changes, in the generational catchphrase coined in 1971 by rocker David Bowie, who turns 59 on Jan. 8.

In this series, The Washington Times examines how the aging of America’s largest generation will rock the social-service and health-care systems created by their parents and grandparents’ generations — and how the boomers are living out their own vision of getting older.

The squeeze

The basic programs that support the elderly — Social Security, Medicare and, for poor seniors, Medicaid — all require today’s workers to pay for today’s beneficiaries. But health care costs are rising even as the average number of workers supporting each retiree falls.

The numbers define the challenge:

• The beneficiaries — the population 65 and older — will grow by 27 million people in the next two decades, while the workers — those 16 to 64 — will grow by a relatively low 18 million.

• Since 1935, the age for receiving full Social Security has moved from 65 to 67, even as life expectancy has increased from 63 to nearly 80.

• By 2050, 5 percent of the population will be 85 years or older — three times today’s rate.

“On the path that we’re headed on today, either there have to be dramatic changes in entitlement programs and other federal spending, or dramatic tax increases to close the fiscal gap,” says David Walker, head of the Government Accountability Office, the federal government’s chief watchdog agency.

The baby boom itself is a strange occurrence. A centuries-long decline in fertility rates was reversed for a two-decade period — in the United States as well as in some other industrialized countries.

The return of U.S. troops from World War II does not explain why the boom lasted for 20 years and why births per woman actually increased. Also, many of the women who gave birth during the peak of the baby boom were too young to have been just catching up for the war years.

Economist Jeremy Greenwood and colleagues write in a recent paper in the American Economic Review that the boom resulted from “an atypical burst of technological progress in the household sector” — in other words, washing machines and refrigerators that made it cheaper to have more children.

Whatever the reason, the boom marks a fundamental shift.

“This is not an issue where … you go along, the baby boomers show up and then they go away. It’s — you go along, the baby boomers show up, and we’re older forever,” says Douglas Holtz-Eakin, director of the Congressional Budget Office. “We are moving towards a permanent shift in the population, where there are more old folks relative to young folks.”

Pursuing reforms

That shift, Mr. Holtz-Eakin says, will require permanent changes to Social Security, Medicare and Medicaid. If left on autopilot, these programs literally will eclipse the federal budget as more baby boomers retire.

It’s simply a matter of math.

Currently, the federal government spends about 20 percent of the gross domestic product on all its services and runs a deficit because it collects about 18 percent of the GDP in taxes. Social Security accounts for about 4 percent of GDP, and Medicare and Medicaid together account for another 4 percent.

But in the next 45 years, Social Security costs are expected to reach 6.3 percent of GDP and with Medicare and Medicaid, costs could grow to an astronomical 18 percent of GDP — or nearly what the entire federal government consumes now.

One strategy is to reform programs one at a time, starting with Social Security. But another strategy calls for examining the issue of aging across all government programs to decide what is needed for an older population, what the government appropriately can and should provide and then how best to provide that.

Mr. Holtz-Eakin argues that leaders first must decide how much money they want to devote to older Americans in the future. Once the appropriate level is set, leaders must decide which programs to spend that money on.

Mr. Walker says that in all likelihood, that will mean future generations should expect to assume more responsibility for their retirement income and count on less help from the government.

The numbers suggest that health care is the biggest issue, particularly because costs continue to rise and because of Medicare, which promises excellent medical care to anyone 65 or older.

President Bush and Republicans compounded the issue two years ago by passing a new prescription-drug entitlement program as part of Medicare.

Another issue will be political power. Older people are more likely to vote, and that means the boomers will be a potent political force. They could choose to oppose programs for younger residents, or vote to approve more benefits for themselves.

That sort of change already has happened in places such as Youngstown, Ohio, Mr. Hodge says, where an aging population voted down school bonds.

Sunnier outlook

Not everything about the new gray is gloomy news, though.

Brad Edmondson, former editor of American Demographics, argues in a recent issue of the Milken Institute Review that although Americans are living longer, they also are living healthier and having a shorter period of illness or “morbidity” before they die. He says that already might be having a positive effect on Medicare’s bottom line.

Policies should encourage healthier living now, he argues:

“How much of a factor the delay of morbidity turns out to be depends in a real sense on what we do now. The science is pretty clear that if you take good care of yourself, you’ll have a much shorter period of illness before you die.”

How big that effect will be is not clear, he concedes, as is the actual basis for many demographic projections. He points to Africa, where nobody 20 years ago could have foreseen the effects of AIDS on the population, and to the 1930s, when nobody could have predicted the effects of penicillin and other antibiotics.

Although the federal budget will be stretched, some states expect to do better when boomers retire.

A 2003 study by the Center for the Economics and Demography of Aging at the University of California at Berkeley concluded that with immigration from overseas, budget pressures actually will decrease — to the tune of a 10 percent reduction in state taxes by 2020.

But predictions say that only 17.8 percent of Californians will be older than 65 in 2030 — less than the national average of a little less than 20 percent.

Some policy-makers argue that immigration can mitigate the problem nationwide, but immigration levels are difficult to predict — and subject to political concerns.

“You’d have to increase immigration to probably politically unsustainable levels,” says Robert L. Bixby, executive director of the Concord Coalition — two or three times today’s current level of more than a million legal and illegal immigrants a year.

And because those workers eventually will retire, he says, it doesn’t solve the situation — it just pushes the key dates back.

Tough choices

The basic options are: one, scale back the promises made; two, raise taxes to unprecedented levels — say, twice what they are now; or three, incur astronomical deficits.

Tax increases alone probably won’t work, especially if Medicare and Medicaid approach 20 percent of GDP.

“We’d have to double everything,” Mr. Holtz-Eakin says, citing the income tax, payroll tax and gas tax.

And deficits aren’t an answer, Mr. Bixby says, because that’s just putting the burden off a little while.

Mr. Walker predicts that the eligibility age for both Medicare and Social Security likely will be raised in coming years.

As the Urban Institute argues, people who work extra years can support themselves, contribute to the economy and pay taxes — all of which reduces the burden on younger workers.

But Barbara A. Butrica and her colleagues at the Urban Institute say the system of taxes and benefits discourages work at an older age. By 65, most workers can receive almost as much income in retirement as they would if they kept working.

Some countries have had success in encouraging work, particularly Japan, where the government has raised the official retirement age from 55 in the 1980s to 60, and it goes to 65 in 2013. More importantly, the average expected retirement age, or effective retirement age, is almost 70.

The trend, though, is heading in the other direction.

The effective retirement age is 64 in the United States, according to the Organization for Economic Cooperation and Development, a group of major industrial nations. And many boomers are looking closely at an earlier retirement age of 62.

Another option is for American women to have more children — to create a second boom, in essence.

But that does not appear to be happening. At the peak of the baby boom, in the late 1950s, the fertility rate was more than 3.5 births per woman, according to the Census Bureau. By the mid-1970s, that had fallen to about 1.8 births per woman, then rebounded to average 2.0 or 2.1 births per woman in the past decade.

Which way out

Mr. Bixby throws cold water on another option — that of increasing economic growth, or the size of the economic pie, so that the government’s share can be less.

“There’s no way the economy can grow fast enough to satisfy these promises,” Mr. Bixby says, particularly because Social Security’s benefits are tied to wages, which rise faster than economic growth.

And increased productivity per worker already is factored into wages, so productivity gains won’t outstrip benefits costs.

The short answer, most agree, is that there’s no free lunch to be had.

“The challenge is absolutely enormous,” says Sen. Gordon H. Smith, Oregon Republican and chairman of the Senate Special Committee on Aging. “The numbers simply won’t add up for long.”

And, the senator adds, it “will take some real mature American leaders to help shine a light on how we get out of this mess.”

For now, “no one has an idea that will win majorities in Congress yet,” Mr. Smith says. “Eventually, this demographic tsunami will overwhelm us in a way that will force consensus.”

Part II

Boomers slow down, but won’t quit

Part III

Boomers will not retire from life

Part IV

Business targets boomers’ money

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