With the election behind us, brace yourself for the real debate about the future of Social Security and Medicare. The alarmists in this fight have a simple central argument: Many baby boomers (those born between 1946 and 1964) will live to a ripe old age, making the country a poorer place for everyone, especially those still in the workforce. In the most extreme formulation, pessimists project that, in the next century, we'll be taxing wages at an 80 percent rate to pay for entitlements. (I leave it to others to explain how, in this era of strong antitax sentiment, such statements get someone labeled "refreshingly realistic" whereas proposals to refinance Social Security with a 1 or 2 percentage point increase in the payroll tax are considered politically crazy.)
The aging of the boomers does pose serious public policy questions, but much of the concern, especially with regard to Social Security, is overwrought. The doomsday scenario is based on the ratio of dependent aged people to the working-age population. The more meaningful comparison is the ratio of dependent people of all ages, including children, to working people. When that comparison is made, it turns out that the booming 1950s and 1960s actually had a higher dependency ratio than the ratio projected for the next century.
Longevity, of course, has been increasing since the founding of the Republic. Accompanying that extension of life span has been a growth in per capita income that makes America today rich beyond the dreams of any of our forebears, and fabulously rich by the standards of the world at large. Granted, we haven't gotten rich because people are living longer, but neither has longevity bankrupted the nation. Today, we're less sure than ever about when people are too old to be productive. Today's elderly are both healthier and better educated than were their predecessors. In 1974, the average educational attainment of the elderly was eighth grade; now it's twelfth grade and going up.
Our overall economic pie is a product of many things: the labor of those working; the exploitation of resources, some of them irreplaceable; and the use of capacity (capital stock) created by past generations. The real economy's goods and services are allocated in our society by, in addition to the accident of birth, a complex interaction of capitalism and democracy. If you do well in the marketplace, you can take care of yourself when you're old. If you don't, our political system has produced a limited safety net, composed largely of Social Security, Medicare, and Medicaid, that covers minimal needs.
WHEN THE BOOMERS WERE BABIES
The attack on current safety-net policy insists that we are overly generous to the elderly and that their growing numbers relative to the working population make current levels of consumption by seniors unsustainable. In the future, it's asserted, there will be too few workers to produce enough to support the social safety net. But when they were kids, the baby boomers posed a challenge that may have been even greater. There were even more of them then, and for 15 or 20 years they produced little. They made complicated demands on the real economy, and society had to respond out of the much smaller economic pie that existed at that time.
Today there are 120 million Americans at work and 140 million not working (46 percent workers). When the boomers are all retired in about 2030, there will be 160 million workers and 200 million nonworkers (44 percent working). But recall that in 1964, when the boomer population peaked, there were 70 million Americans working and 120 million not working (37 percent working)—a ratio considerably "worse" than we can expect in the twenty-first century. Another way to look at the dependency "burden" is the number of young and old dependents per 100 workers. In 1993 that ratio was about 70 to 100. It will rise to 83 per 100 in 2030. But, again, in 1964 it was "worse" at 96 per 100.
Odd, isn't it, that no one, including the boomers' parents, recalls the 1960s as an era of economic deprivation?
As kids, boomers comprised over 40 percent of the population; today, they are less than 30 percent; in retirement they'll drop below 25 percent. The cost of raising the boomers was high; conservative estimates of the average cost of raising a child are about $300,000, in current dollars. (Coincidentally, this number is almost identical to the "insurance value" to a family of Social Security coverage.) But there was no free lunch: Boomers as children consumed goods and services from the real economy, just as they will as seniors.
In the postwar era, school systems routinely were overloaded. The market for consumer goods was transformed by the special demands of millions of children and teenagers. Boomers started changing American culture during the 1940s, and they are still at it. Rock and roll, increasing crime rates, and suburbanization are all related to the youth and numbers of the boomers. Subsequent revolutions in the labor market, family and marriage, the status of women, and the civil rights movement are also, to varying degrees, connected to the sea changes brought about by the boomer generation.
THE CHALLENGE WE MET
From the beginning, the Americans who had lived through the Great Depression and World War II expected the public sector to play a pivotal role in the adjustments caused by the arrival of 80 million boomer children. The government did produce vast programs to build schools, train teachers, and, later, to provide college loans and grants. Between 1952 and 1970, elementary and secondary school expenditures increased more than 275 percent in inflation-adjusted dollars. Between 1964 and 1980, the number of college and university students increased more than 125 percent, and the number of college instructors more than doubled. The boomers' parents, through their taxes, built these schools and colleges for their own and other people's children. Americans also provided support for the nearly 30 percent of boomers who lived some part of their childhood in poverty.
What are we to make of all this? With fewer resources, with higher marginal tax rates, the boomers were fed, clothed, educated—as Bob Dole would say, whatever. At the time, we also had a higher national savings rate—in other words, more foregone consumption by workers. Theda Skocpol emphasizes that the burden was easier to bear because the nation invested much in "upgrading" the boomers' parents, especially through the GI Bill [see "Delivering for Young Families: The Resonance of the GI Bill," TAP, September-October 1996]. Eight million veterans sought higher education, more than doubling the percentage of Americans who went to college. The cost was about $100 billion, in 1996 dollars. But the real purchasing power was even greater: veterans went to Princeton on the GI Bill's $500 stipend. Veterans Administration housing subsidized about a quarter of all the new residences in the nation. In fact, public investment in both people and infrastructure was very high during the entire postwar period.
Today, the success of the boomers' parents is explained largely in terms of the extraordinary economic growth for 20 years after World War II. To be sure, the psychological effect of being part of a rapidly rising tide of income was an important factor. Similarly, the sense of the nation's ability to deal with big problems through the public sphere was another unprecedented characteristic of the era. The boomers' parents, after all, had lived through the Great Depression and World War II. These back-to-back events created an overwhelming sense of America's ability, with people pulling together, to overcome obstacles. Families having more children could hardly have seemed like a catastrophe.
While growth is slower today, the economy continues to expand, and, even given modest assumptions about the future, will continue to grow. The economist Robert Eisner and others point out that, compared to 1964, we shall have triple the resources available (in constant dollars) in the next century. The boomers' parents shared a gross domestic product that, per capita, was $12,195 (inflation adjusted). We now produce $20,469 per capita, and in 2030 we'll have an estimated $35,659 per capita. These projections assume modest growth of less than 2 percent annually for the next 75 years.
In this context, the alleged fears of the future by some members of Generation X, who will inherit the largest economy in the history of the world, seem somewhat out of proportion. As far as we know, we face nothing like the Great Depression or international threats on the scale of Hitler, Imperial Japan, or the Soviet Empire. It is not given, after all, to any generation to have completely smooth sailing. A larger number of older people would seem, by twentieth-century standards, a reasonably modest challenge. A more realistic assessment of the balance between the challenges Generation X is likely to meet and the resources available to meet them should inspire optimism rather than apprehension.
Of course, there are those who insist that in the pinched, slow-growth economy of the future, it would be unjust for seniors to have so much of the pie. This argument, usually couched in terms of "generational justice," implies that we can't afford the consumption of those who contributed so much to building the economy. Remember that the boomers represent the largest workforce we've ever had—a workforce that expanded the economy more than any previous group. The boomers' children will inherit a vastly larger economy with enough resources for all. Every generation depends on others: Children must depend on parents, as well as on strangers who build bridges, plants, schools, office buildings, and industrial equipment. Even the debt a new generation must pay off is accompanied by the government bonds and other assets that it inherits. Should boomers charge rent for the portion of the nation's capital stock, including knowledge and inventions, built or dreamed up by their generation?
While boomers came into the world with nothing, on their way out they'll have a few trillion dollars in pension funds—more than any previous generation—and substantial real estate to help pay the freight. But they are not all likely to get lucky and fully fund their own retirement with no help from Uncle Sam; capitalism just doesn't work that way. Of course, if, somehow, all the elderly did turn out to be like Bill Gates, they'd be able to command all the goods and services they wanted. Then they would get more of the pie, and younger people would get less. More specifically, consider the preferences of rich seniors as consumers: It's a good bet that they buy as much or more medical care than those completely dependent on Medicare.
PAYING FOR HEALTH
Since most aging Americans are not wealthy, the question of how to finance their growing need for health care will be resolved, not only in the marketplace, but also in the public sector. A bipartisan commission to study Medicare is only a first step. The coming struggle is sure to be politically brutal, with no "winners" and lots of painful choices. The issues in health care are simply much harder to deal with than are the rather modest adjustments necessary to sustain Social Security.
By 2030 nearly 20 percent of the population will be eligible for Medicare, up from 12.8 percent today. The advance of medical technology and other trends will almost surely keep health costs rising faster than general inflation. Increasing the number of the elderly in managed care may help the short-term problems of the Medicare trust funds over the next decade, but the potential savings from managed care as we know it are not sufficient to pay for the expansion of the Medicare population and the higher costs per capita on the horizon. If America responds to the aging of the baby boomers as it did to their youth in the 1950s and 1960s, we will agree to pay the higher taxes that their medical care will cost even as the program is subjected to stronger cost controls. If, however, America responds as the alarmists urge, the program will just be cut by reducing the number of beneficiaries (for example, by means testing or raising the age of eligibility), restricting benefits, or sharply rationing care. But let us not fool ourselves: Extreme restrictions are not economic necessities; they are political choices.
To the extent that the growing Medicare expenditures reflect the preferences of consumers and voters, they are not "bad" for the nation. Health care, after all, is a high-tech domestic industry, with a growing base of domestic jobs that pay reasonably well. A population that spent even more on health care would not necessarily be worse off than we are today.
FALLACIES OF THE APOCALYPSE
Although the future will involve plenty of unpleasant surprises, a close look at the alarmists' economic projections reveals how far-fetched they are. Their pessimism—especially in terms of the likely real economic situation 30 or 40 years from now—involves numerous internal inconsistencies. The Social Security Advisory Commission, for example, already assumes reasonably slow growth for the next generation or two. The alarmists think the projections should be even grimmer. Why? Surely not because the nation will be older; there is no serious economic analysis upon which to base such a projection (take a peek at already-old Japan and Germany).
The slow-growth scenario is used selectively by those eager to dismantle the safety net. One of the remedies proposed for Social Security, for example, is buying stocks because, it is argued, equity values compound annually (apparently forever) at 7 percent a year. The continuation of such a performance for 75 years in an economy that they project to grow by less than 2 percent a year would be truly amazing!
And what about the push to recalibrate the inflation rate, thus cutting cost of living increases for the elderly? As the economist Dean Baker points out, if this guess about the inflation rate is correct, the forecast for average income in the next century should be dramatically increased. For example, the current estimate of per capita income—$35,000—for 2030 would have to be more than doubled. If we're all going to be that well off, what's the justification for arguing that we have to destroy Social Security in order to save it? In other words, when it supports their arguments, the alarmists emphasize a sluggish economy; when it doesn't, they're back to the rosy scenario.
Realism about the size of the overall economic pie and guidance derived from the lessons of the past should shape adjustments in entitlements for seniors. But our approach also should conform to basic values shared by most of the elderly. "Solutions" like privatization of Social Security that are sure to increase the already serious levels of inequality should be smoked out as ideological preferences and not fiscal imperatives.
As a society, we can continue to insist that if you work hard and play by the rules, you can count on a social safety net in old age. Let's reject plans that are likely to increase poverty among any age group. And we can stay true to tested principles by fighting harder for policies that are already part of mainstream politics: controlling the budget deficit while protecting Social Security and Medicare; increasing the minimum wage and expanding employment to bolster savings and growth; and directly addressing the corrosive effects of the growing income and wealth inequality.
The boomers' children, like the boomers' parents, will muddle through. When the boomers were kids, there were also occasional squeezes on resources: double sessions in schools all over the country and a crisis over the need for more college spaces and faculty. The boomers will get less than they want, but far more than the alarmists think is possible. Politics will continue to play the most significant role in how this shift takes place. Both the values of a democracy and the realities of capitalism support the basic soundness of the current framework for policy, albeit with changes that strike a balance among the competing demands of Americans of all ages.
America is facing change, but not disaster. We can be realistic about the future and still believe that the nation can grow older gracefully. So, we should hang on tight to the most fundamental contract we have with one another: If an American works, and then can't work because of age, that citizen will not have to live in poverty.