Political-Economic Thoughts on Aging

“Greece’s recent fiscal meltdown wasn’t caused just by care-free government spending.  It was an inevitable result of the country’s aging population, which has long been accustomed to extravagant health care and retirement benefits.  This is what happens when 19th-century policy prescriptions are applied to 21st-century realities.” Butler, R.N. and Hodin, M.W. ‘ Wither the aged’ The Washington Times, May 24, 2010

The Greek government justifiably has come under fire from Angela Merkel for allowing its citizens to retire on government pensions at the early age of 53 years.  What is left unsaid is that many public sector employees in other countries, not least in the United States, are eligible to retire on pension at similar or even earlier ages: military veterans, the police, school teachers, university professors, civil servants, and many others become vested often after only 5 years of service and in some instances can retire on full pension after 20  or 30 years of service: to live for perhaps for another 30 or 40 years.

 Individuals in the United States qualify for full social security pensions at the age of 66 years, slowly increasing to 67 years, at which time their average life expectancy is 17 years (higher for women than for men). As with social security, so with medicare, recipients typically do not cover their anticipated receipts with required outlays during their working lives. Here is the ticking time bomb for all aging populations. By 2050, Europe, Japan and Korea will have more than 40 per cent of their populations older than 60, and China will have at least 25 per cent of its huge population in that category. In the United States, the number of its citizens older than 65 years will double between 2010 and 2030.  Such demographics must impose a high and rising burden on the younger generations unless painful structural changes are imposed on government outlays to the elderly.

When confronted by irreversible trends, rational individuals should plan for incentive-compatible solutions. In private market systems, such is the expectation. However, in political markets, rational ignorance, rational irrationality, and interest group pressures combine to render such forward planning toxic. So, in this column, let me set aside the public choice problems and provide a thumb-nail sketch of an economically viable solution that does not discard a degree of public sector support programs for the elderly.

First, the pension plans of public sector employees should be placed on fiscally sound principles. Public sector employees should fully fund their retirement pensions through salary deductions. If markets require that such an adjustment must be reflected in higher pay within some parts of the public sector, at least the cost is upfront and not spread across a lengthy post-retirement time-span.

Second, the age requirements for accessing social security and medicare should be expanded to reflect increasing life-expectancy. A shift with early effect from 67 to 70 years, with subsequent extensions linked to rising longevity, will do much to  defuse the time bomb that ticks away. This change alone will encourage able-bodied individuals to remain in the labor force unless they have accumulated sufficient private savings to provide them with the leisure option. In addition, social security payments should be linked to the price index, not the earnings index, so that pensioners do not become better off over time through accessing the program.

Third, medicare provisions should be controlled to avoid waste in near-hopeless attempts to extend life in terminal situations. Heroic interventions are fine for those with the private resources to pursue them. But a situation in which one-third of average lifetime health care costs are expended in the final six months of life is unsustainable through the public purse. All individuals are mortal, and eventually will die. If medicare is to remain fiscally feasible as the proportion of the population that ages escalates, and as life-extending technology advances at rising marginal cost, common-sense decisions on allowing patients to pass on are inevitable.

Fourth, incentives should be put in place to ensure that medicare-supported individuals help themselves to minimize their medical bills. Patients whose medical bills are induced by life-style choices, lack of exercise, excessive use of alcohol, smoking, excessive eating, etc. should be required to offset such bills by co-payment requirements. Where such payments are not extractable, such patients should be placed at the back of any queue for medical services until they are seen to help themselves.

By such measures, the United States will avoid becoming Greece as its population ages and its welfare programs remain, substantially, in place.

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