    According to a recent summary from the Congressional Budget Office, because our population is becoming older and sicker spending on Social Security, Medicare, and Medicaid is set to explode and the resulting mountain of debt will overwhelm us. Here are the depressing statistics.
    The CBO has posted a slideshow of charts entitled "Aging and Health: The Challenges of Entitlement Growth." I would rate this report "not suitable for children" – not because of sex, violence, or bad language, but because of the despair it may engender in them for our country's future. Â
    The essential problem is illustrated in Slide 8, entitled "The Population Age 65 or Older as a Percentage of the Population Ages 20 to 64." This slide shows that during the 25-year period from 2012 and 2037 the ratio of Americans who are over age 65 will double in comparison to the number of persons who are aged 20-64 – from about 18% to about 36%. That means that instead there being about 5 persons of working age for every person of retirement age, the ratio of workers to retirees will be less than 2:1.Â
    On average, our population will be much older and sicker. Fewer people will be working to support more people who are retired. Spending on Social Security, Medicare, and Medicaid will skyrocket while tax revenues remain comparatively stable. The result will be an accumulation of debt – a trend that is clearly not sustainable.
    Slide 3, "Revenues and Outlays Under Policy Alternative to Extend Tax Cuts and Index Alternative Minimum Tax," reveals that federal deficits have historically averaged about 3% of Gross Domestic Product, but that during 2009 the deficit ballooned to over 10% of GDP. It also shows that if we repeal the Bush-era tax cuts and refuse to index the Alternative Minimum Tax threshold, then within a few years we will return to a period where federal deficits will average 4% of GDP. However, the debt will continue to grow, due in part to yearly budget deficits, but ultimately because of interest accumulating on the debt itself – the magic of compounding.
    The really scary chart is on Slide 5, "Federal Debt Under CBO's Long-Term Budget Scenarios." It shows that for several decades the federal debt has averaged between 30% and 50% of GDP, but that the debt will explode and within a few decades the debt will reach 200% of GDP. Even if we repeal the Bush-era tax cuts it will only delay this process – it would still occur, commencing about the year 2025. By that time there simply won't be enough working people to pay the bills.
   The CBO proposes the following solutions, none of which is an attractive choice:Â
1. Increase the retirement age;
2. Decrease social security benefits, particularly among high-income recipients;
3. Decrease payment to health care providers per health care service;
4. Decrease the number of health care services provided;
5. Increase tax rates within the current system; or
6. Institute a new tax such as a value-added tax.
    Sorry to offer you such depressing reading today. No wonder economics is referred to as the "dismal science."
{ 6 comments }
Thanks for the info, Professor. One question: How, if at all, will the Pelosi health care bill address these demographic trends?
Death panels might help.
1. Increase the retirement age; — Yeah, that's right. Keep us working longer so we can support the generation that failed to fix the energy problem; scraped off all of the pension money for their own selfish needs; want cadillac care on a pinto budget; and, drove this country into mountainous debt. Yeah, that's right. Let's do that.
2. Decrease social security benefits, particularly among high-income recipients; Means testing is coming, I am absolutely certain of it. So, that means that people that have made those educational and income-delaying sacrifices; that have scrimped and saved for their 401K and investments will support those of us that have not. Why doesn't the government just get honest and say to people that make and save money: YOU ARE NOT GETTING YOUR SOCIAL SECURITY MONEY, WE ARE STEALING IT TO TAKE CARE OF THOSE THAT DID NOT SAVE LIKE YOU DID.
3. Decrease payment to health care providers per health care service; — Ok, so now we lead to rationing? And, by rationing I mean that if it takes X patients to pay the bills and feed the staff then once we cut payments it is going to take Y patents for the same costs. This will result in less staff and less per-patient time.
4. Decrease the number of health care services provided; Isn't that what we call rationing?
5. Increase tax rates within the current system; More tax? Aren't we already taxed enough?
6. Institute a new tax such as a value-added tax. More tax? Aren't we already taxed enough?
There has got to be a better way……
I am shocked to find out that Ponzi schemes are not sustainable. Rather than tweaking tax rates or benefits to merely delay the inevitable collapse, we should be working toward unwinding these programs.
Medicaid can be eliminated immediately without anyone suffering any real harm. Individuals are ultimately responsible for providing for their own health, and I don’t think anyone can seriously claim they relied on Medicaid’s existence to plan their finances. Social Security and Medicare present more difficult questions because it is difficult to determine who should bear the loss. Ideally, we would be able to attribute the entire loss to those who have ever supported the existence of these programs by electing politicians who supported the creation or continuation of the programs, while those innocent individuals who have opposed the programs would have the option of either being given the benefits promised or having the value of their premiums returned with interest. Unfortunately, that is impossible to determine. We could try to apportion responsibility based on age, saying that the elderly, as a group, had more opportunity to eliminate Social Security and Medicare earlier and thus should bear a greater portion of the loss through reduction of benefits. Unfortunately the innocent elderly would suffer the same as the guilty.
A downside of government-run retirement programs is the destruction of personal accountability. I would note that we don’t have this problem in the private sector where those who invest in Ponzi schemes or other bad investments are held responsible for their own bad choices. The people who were duped by Bernie Madoff and didn’t provide adequate oversight are the ones who suffered the loss. The Enron employees who invested all their retirement savings in company stock were the ones who were wiped out. These are proper results, as the people who were recklessly irresponsible are the ones who suffered the loss. We should at least provide for opting out of Medicaid, Medicare, and Social Security so that going forward, only those who choose to participate will suffer the inevitable loss.
Why didn't anyone suggest printing more money?
P.O.L. — Agreed.
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