When Congress created Medicare in 1965 to handle the health care needs of the older population, less than 10 percent of Americans were old enough to collect Social Security and the new medical benefit.
Since then, the share of Americans 65 and older has soared, from 9.3 percent in 1965 to 13.7 percent in 2012.
And as the number of retirees increases and expected life spans extend far beyond 65, the share of those who work and financially support the programs has been shrinking. In 1965 there were four workers for every retiree drawing benefits. By 2012, the ratio had fallen to 2.9-to-1.
This is only the beginning. As the retirement ranks of the baby boom generation grow, an expanding elderly population and the shrinking share of workers will put even more pressure on entitlement programs. Experts project that life expectancy will rise to 83 years by 2035, compared to 78 years in 1965. As the population ages, the ratio of workers to beneficiaries will plunge — to a projected 2.1-to-1 in 2035.
It’s this inexorable curve, a demographic reality often buried beneath the political debates about budget priorities, that presents the biggest, often unstated, challenge to lawmakers wrestling with the impact of entitlement programs in coming years.
Although the continuing increase in medical costs plays a role in the growth of Social Security and health care programs, “demographics is the bigger factor, hands down,” said Charles Blahous, a public trustee for the Social Security and Medicare Boards of Trustees.
Blahous, a senior research fellow at the free-market-oriented George Mason University Mercatus Center, said there’s not much doubt about the reliability of the population estimates. The profiles of populations run in enormous waves over long periods, and they’re the big drivers of broad economic trends.
“Over the next couple of decades, the plunging ratio of taxpaying workers to recipient beneficiaries is driven largely by historical fertility patterns, and those are in the books already,” Blahous said. “The baby boomers have already been born, they’re heading onto the rolls now, and they’re pretty much done having children.”
In its long-term budget outlook last year, the Congressional Budget Office identified demographics as the chief factor in the growth of Social Security and health care programs.
“Through 2022, the aging of the population will cause spending on the major health care programs and Social Security to rise significantly,” the CBO wrote. Aging “remains the more important factor” in cost growth for several decades.
The CBO projects the aging population will account for 75 percent of the increase in Social Security and health care spending combined through 2037. With Social Security removed from the equation, aging is still responsible for 60 percent of the increased spending in Medicare, Medicaid, the Children’s Health Insurance Program and health insurance exchange subsidies, according to the CBO.
The baby boom began in 1946, and the postwar surge produced 76 million births before it ended in 1964. The first boomers reached the Social Security retirement age of 65 in 2011, and in coming years they will retire in waves. Meanwhile, the U.S. fertility rate has fallen below the level needed to keep the population stable, promising fewer workers in the future to pay the taxes that support social insurance programs.
Over the past two years, Congress has reduced the growth of discretionary spending through the imposition of spending caps and a sequester that makes additional cuts through 2021. As a result, the focus has begun to shift to mandatory spending programs — the largest of which are Social Security, Medicare and Medicaid — which make up about 60 percent of the budget and account for the most rapid spending growth.
The demographics-driven growing costs of the entitlement programs have serious fiscal implications.
In its annual report last month, the Social Security and Medicare Boards of Trustees projected the Social Security disability trust fund will be depleted in 2016, while the main Social Security trust fund — old age and survivor’s benefits — would last until 2035. The Medicare Hospital Insurance trust fund is estimated to have sufficient funds to cover its obligations until 2026, the trustees said. Combined, the old age and disability funds face a depletion date of 2033.
Despite the central role played by the aging of the population, lawmakers have focused more on restraining health care costs than on demographics, perhaps because they have little control over it.
“The thing about demographics is that there’s basically not much you can do about it,” said Paul N. Van de Water, senior fellow at the left-leaning Center on Budget and Policy Priorities. “Health care costs are something we can do something about.”
Congress, for example, cut more than $600 billion from Medicare over a decade in the 2010 health care law, primarily by reducing payments to medical providers. In a contrasting approach, House Budget Chairman Paul D. Ryan, R-Wis., wrote a Medicare premium-support proposal aimed at bringing down medical costs, he says, by injecting more competition into the health care system.
In his fiscal 2014 budget, President Barack Obama addressed Social Security directly by proposing to slow the growth of the program’s cost-of-living raises by switching to the “chained Consumer Price Index,” a stingier measure of inflation. It’s an approach supported by many Republicans but decried by many congressional Democrats.
Although it’s all but impossible to control demographic trends, ideas abound for adjusting programs in response to them. These include raising the eligibility age for Social Security and Medicare to reflect increasing longevity, generating more revenue by increasing the payroll tax, and adjusting tax and other policies to encourage seniors to continue working.
Expanding immigration is sometimes suggested, but Van de Water said the effect of that is uncertain. “Under certain circumstances additional immigration can be a net plus for Social Security,” he said. “Whether it’s a net plus for Medicare is another matter. But it’s unlikely to be a major plus.”
Despite the broad trends, some believe the demographic challenge has been exaggerated. “There’s a lot of doom-and-gloom talk that somehow the aging of the baby boomers spells disaster for the budget or for Social Security or Medicare or whatever,” Van de Water said. “It’s not something which can’t be handled through some combination of tax increases and benefit cuts. It’s something which we can cope with.”
But Blahous, in his own assessment of the trustees’ report, expressed alarm about the prospects for Social Security if action is not taken soon.
He wrote that the report “explains how the problem will essentially become insoluble if lawmakers wait until 2033 draws near to address it. By 2033, scheduled benefits could only be paid by raising tax revenues by the equivalent of an increase in the current tax rate from 12.4 percent to 16.5 percent — an increase of nearly one-third in worker tax burdens.”
Avoiding a tax increase would require cutting costs “by the equivalent of a 23 percent across-the-board benefit reduction — one that would apply regardless of the beneficiary’s income level or whether she had already been dependent on benefits for decades.”