March 18, 2013
The Real Economic Implications of Our
Senior Entitlements Challenge
Economics is art masquerading as science. Demographics is
not only science, but destiny. Chart 1 shows the changing demographics of
America. It shows the rising trend in the proportion of senior “takers” in
America. Back in 1960, those U.S. residents aged 65 or over made up 9.2% of the
total population. That percentage had risen to 13.1% by 2010 and is projected
to move up rapidly in the coming decades, reaching 21.9% by 2060. I refer to
this (my) age cohort as “takers” because most Americans in this age group
retire from the workforce – stop “making” – and primarily just “take” or
consume. The preparation, or lack thereof, for this significant increase in
senior “takers” has important implications for the future long-term potential per capita growth of the U.S. economy.
Chart 1
My perception is that this changing demographic
phenomenon is being discussed in the mainstream media primarily in terms of its
impact on federal government spending. Indeed, the projected increase in the
number of U.S. seniors will have important implications for federal government
spending, more so on the composition of total spending than the growth in total
spending. Chart 2 shows actual and CBO- baseline projected fiscal
year-over-year percent changes in total federal government outlays from 1974
through 2023. Also shown in Chart 2 are the actual and CBO-baseline projected
federal expenditures on senior entitlements – Social Security and Medicare – as
a percentage of total federal outlays for the fiscal years 1973 through 2023.
The senior entitlement spending is understated because it does not include Medicaid expenditures for
senior nursing home care.
Chart 2
The projected median annual growth in total federal
outlays in the fiscal years 2013 through 2023 is 5.5%. This is lower than the
6.1% annual median growth in total federal outlays in the fiscal years 1974
through 2012. So, projected growth in total federal outlays in an environment of
a rising proportion of U.S. seniors is not extraordinary. As an aside, average
annual growth in total federal outlays in the three fiscal years ended 2012 was
0.2%. So, the perception that federal government spending currently is
excessive may hold for the absolute level, but not for its rate of growth in
the past three fiscal years. But let us never allow facts to get in the way of
opinions.
What is more noteworthy in Chart 2 than the projected
annual rates of growth in total federal government spending is the rising
percentage of that spending dedicated to senior entitlements. In fiscal year
1973, senior entitlements accounted for 24.4% of total federal outlays. By
fiscal year 2012, this percentage had risen to 37.3% and is now projected by
the CBO to rise further to 42.1% by fiscal year 2023. Assuming that there is a desire
by the body politic to limit growth in total federal outlays, federal senior
entitlement spending inexorably is “crowding out” other categories of federal
government expenditures, for example, infrastructure, education and scientific
research. Now we are getting to the
implication for future per capita economic
growth as a result of the aging of America. To the degree that federal
government spending on infrastructure, education and scientific research
enhances productivity growth – and, to be sure, there is much disagreement as
to this degree – then the crowding out of this federal spending by increased
senior entitlement spending implies slower future per-capita growth in the U.S.
economy.
Assuming it were politically feasible, could we mitigate
the negative effect on future per capita
economic growth emanating from increased federal spending on senior
entitlements by simply cutting back on these entitlements? This would not change
the demographic trend. There still will be millions of baby boomers moving into
their mid to late 60s in the next 20 years. If their federal entitlements were
curtailed, some baby boomers might try to delay their transition from “makers”
to “takers”. [With apologies to Ms. Hortense Mintz, who drilled me and attempted to skill me in the writing of
the English language at Manhattan Elementary School in Tampa, Florida, I am
adopting the British convention regarding the placement of punctuation in
relation to quotation marks because it seems more logical to me.] Others, who
already have become “takers”, might transition back to “makers”. But this is unlikely to materially affect the
large number of U.S. residents exiting the labor force because of age. So, there
still is going to be a significant increase in the number of Americans, due to
aging, consuming without producing in the next 20 years. If the federal
government does not transfer funds from the cohort of “makers” to these senior
“takers”, then the children of the senior “takers” or charities will provide
funds to help feed, house, clothe and medicate them (me). This certainly would
reduce the amount that senior “takers” consume, especially on discretionary
goods and services, compared to what would have occurred if the government had
not cut back on senior entitlements. For example, if Carnival Cruise Lines has
problems now with its equipment breakdowns, just wait until senior “takers” ask
their children for some extra cash so that they can take that winter Caribbean
voyage! Regardless of who writes the check, in the next 20 years, there is
going to be a substantial increase in the number of Americans who are consuming
without producing. This is going to divert resources away from productivity
enhancing uses, such as investment in physical and human capital. This, in
turn, implies slower future real per-capita economic growth.
This slower future real per-capita economic growth that I
expect was not inevitable had we saved for this demographic event. Had the
private sector saved more, then the capital stock, both physical as well as
human, would have grown faster. In turn, this would have enhanced future
productivity growth and, thus, future real per
capita economic growth. The advent of Social Security in 1935 and Medicare
in 1965 created disincentives for American households to save for their
consumption in retirement. Why should households save as much for their
retirement when the government has promised to supplement their effective
retirement income? If the government is going to supplement retiree income,
then it is incumbent on the government to save more in anticipation of this. Had the government saved more, i.e., run
surpluses or smaller deficits, this would have left more resources for use in building
up the stock of physical and human capital. Had the nation as a whole saved
more, then the U.S. economy might have been running trade surpluses with the
rest of the world rather than persistent trade deficits. Cumulative trade
surpluses would have allowed us to import more goods and services as “makers”
transitioned into “takers”, permitting us to continue building up our capital
stock so that future “makers” would be more productive. But, alas, as shown in
Chart 3, the saving of combined government entities in the U.S. has been
trending lower relative to GDP throughout the post-WWII era. Private saving
relative to GDP has been trending lower since the mid 1980s. It is ironic that
total net national saving as a percent of GDP peaked in 1965, the year in which
the Medicare entitlement was signed into law.
Chart 3
In sum, because we
did not increase our aggregate saving in
anticipation of the significant rise in the proportion of senior “takers” ,
real per capita economic growth in
this country is likely to be adversely affected in the next 20 years. This does
not mean that growth in our aggregate standard of living will be stagnant. But
it does suggest that our per capita standard
of living will grow slower than it has in most of the post-WWII era. Even if it
were politically feasible to pare back entitlements to current senior
recipients, this would have only marginal salutatory effects on the economy’s per capita real growth in the next two
decades. Similar to the estimated 11 million undocumented “makers”, we
baby-boom “takers” are here and we are not going away, voluntarily, at least.
One way or another, we are going to eat and get medical care, which is going to
use resources that otherwise could have been used to enhance the productivity
of current and future “makers”. There is
no use crying over spilled milk. But we can take steps individually and, dare I
say, collectively, to lower the probabilities of “spilling milk” for future
generations. Those of us senior “takers” who are fortunate enough not to be
destitute without our entitlements could voluntarily set up educational trust
funds at Legacy Private Trust Company of Neenah, Wisconsin for our
grandchildren, funding these trusts with our Social Security checks and/or with
the funds we otherwise would have spent dining out or taking that annual
Carnival Cruise. I have not looked at the data, but I doubt that there are
enough senior “takers” in this financial position to make a significant impact
in the aggregate. But for those that can set up these trusts, when you rest in
peace you can also rest assured that your grandchildren will reflect fondly on
you. Collectively, we can encourage our elected officials to enact policies
that promote increased saving – both private and public – so that future
generations of senior “takers” do not adversely affect growth in real per capita income when they transition
from “makers”. Good luck with that!
Paul L. Kasriel
Senior Economic and Invest Adviser to Legacy Private
Trust Company
Econtrarian, LLC
1-920-818-0236
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