Demographics is a bigger problem than health care costs

Demographics is a bigger problem than health care costs

The President and Budget Director Peter Orszag frequently say we need to “bend the health care cost curve downward” to address our long-term fiscal problems. This is correct but incomplete.

Here is Director Orszag, writing in last week’s Financial Times: (emphasis added)

As the healthcare debate picks up in the US, there has been much discussion about how to pay for it. Coinciding with this debate are vocal concerns about the country’s underlying fiscal position … which some have suggested as a reason to delay healthcare reform.

What this argument ignores is that healthcare is central to the long-term fiscal and economic prospects of the US. If costs per enrollee in Medicare and Medicaid grow at the same rate over the next four decades as they have over the past four, those two programmes will increase from 5 per cent of gross domestic product today to 20 per cent by 2050.

Healthcare cost growth dwarfs any of the other long-term fiscal challenges the US faces. Nothing else we do on the fiscal front will matter much if we fail to address rapidly rising healthcare costs.

Director Orszag is correct that rising per-capita health spending is a key driver of our long-term fiscal problems. But he overstates his case by ignoring the other driver of federal spending growth, demographics. We need to address both. We need health care reform that will slow the growth of per capita health spending. And we need to change the promises made under Social Security, Medicare, and Medicaid to adjust for a rapidly aging U.S. population.

Let’s look at a graph from the President’s Budget (page 191 of the Analytical Perspectives volume):

chart13-3 This chart shows the combined effects on the big three entitlement programs (Medicare, Medicaid, and Social Security) of two factors: demographics, and age-adjusted per capita health cost growth. The effect of demographics is larger than the effect of “excess growth in health care costs” up until some time in the 2040s. This is why Director Orszag chooses 2050 to make his case.

Director Orszag’s own graph shows that the aging of the population is a bigger driver of spending increases in the federal budget for the next 30-40 years.

There are two forces driving the aging of the U.S. population. People are living longer. This is a good thing.

life-expectancy

This means people are collecting benefits for more years. That’s good for people and expensive for the government.

years-collecting-benefits

Longer life expectancies are a permanent and positive feature of the U.S. demographic landscape. There is a second, transitory cause of the aging of the U.S. population: the Baby Boom. Fertility rates surged after World War II. Before and during the war, each woman had on average about 2.2 – 2.4 babies. That surged to 3.6 babies per woman in 1960, and is now down to 2.0, where it is predicted to stay.

fertility-rate

The Baby Boom began in 1946. You can start collecting early retirement benefits under Social Security at age 62. This means the first cohort of Baby Boomers started collecting their checks in 2008. You can see how the number of new retirees each year is going to spike over the next ten years.

baby-boomers-retire

I think of longer lifespans as a permanently rising tide, and the Baby Boom as a huge wave that supplements that tide. Together, the two of them mean that America is rapidly aging. This is affecting federal and state budgets beginning now. Since Social Security and Medicare are pay-as-you-go systems, in which current workers pay for the benefits of current retirees, this means a larger tax burden is placed on each younger worker. (No, the government does not save your payroll taxes. It has spent and is spending them on other stuff.)

In 1950, there were 16 workers paying payroll taxes for each retiree collecting Social Security benefits. Today, there are 3.3 workers supporting the Social Security and Medicare benefits of each retiree. In the future there will be only 2 workers paying taxes to support the benefits of each retiree.

workers-per-retiree

The rapid growth of per capita health spending in the U.S. is a critical policy problem that needs to be addressed. It is not, however, the primary driver of our federal budget problems over the next 30-40 years. The aging of the population is. Policy changes need to address both pressures to prevent an eventual fiscal meltdown. We must not ignore demographics.

15 responses

  1. Another interesting thing about this graph is that it explicitly excludes any interactive effects between an aging population and health care as purely a health care cost (look at footnote 3 on pg 191 of the AP.) I believe that CBO, when they first did their estimates on the drivers of did the same (I believe in the Nov. 07 publication), but recognized their error in subsequent publications.

    So, not only does this graph not show that in the near/medium term excess cost growth is the driver, it also understates the demographic effect to a significant degree as well.

  2. As of last month (May) the leading edge of the “Baby Boom” generation added 649,000 new Social Security retirees since the beginning of the year. That’s a total of 32,922,000 retirees benefiting from Social Security retirement. The spike in this year’s new retirees can be explained by three factors 1) leading edge of baby boomers hit 62 years old (old enough to qualify for Social Security benefits 2) Social Security Cost of Living Adjustment (COLA) jumped 5.8% 3) the unemployment rate in the US is over 9% (there are no jobs for older Americans). Y/Y change correlations shows that the unemployment rate is the most important reason for the spike followed by the COLA jump and lastly the “Boomer” surge.

  3. Maybe this is why we are going to have the push for rationed care, and the biggest part of that push will be to deny treatment to those deemed to be in that magic last 6 months of life. That will include taking away treatments from cancer and other “end-stage” disease-patients. That’s already happening in places like Britain. I am NOT saying there is a deliberate desire to kill the elderly and ill…but gosh, it seems to kind of work out that they will be the most vulnerable and eventually, there will be more support for that. That one stat, about how we spend inordinate amounts on the last 6 months of life (i can’t remember the figures), is bandied about over-and-over, kind of like the “we have 47 million uninsured”, with not much other regard for what the numbers really mean.

    It’s certainly possible to teach people to have contempt and hatred for the lives of others. Nazi Germany, Soviet Russia, Communist China, Rwanda, Armenia etc. So why would it be hard to imagine that we teach the young to have contempt for the lives of their elders, who are “robbing resources” from the young ones. It’s already happening, of course, as we do not revere our older citizens the way many other cultures did historically, and instead, worship the younger generation.

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  5. Why has it taken us this long to consider (hopefully this is happening) making the retirement age later?

    Reminds me of how the Alternative Minimum Tax never adjusted for inflation….

  6. Brooks-

    Yes, Concord addressed it as well as CBO (while Orszag was the Director) in subsequent publications. This is an interesting mistake on the behalf of OMB then, as Orszag must have known that it’s wrong to include all interactions within health care spending.

    I’m not sure what to make it. On the one hand, there is hundreds of people working for OMB and it could easily be an oversight. On the other hand, you typically don’t find mistakes like these that make their case harder to prove.

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  8. You haven’t mentioned the importance of economic growth. It is flat out impossible to meet the aggregate of pension and entitlement promises if economic growth lags behind the growth rate of that spending. The real danger is that we fall into a vicious cycle, where we are spending so much on entitlements that there is nothing left over for saving and investment, which is key to the long-term growth of the economy.

  9. I feel very lucky to have worked for many years in the high tech industry where costs always go down, performance always goes up, quality always gets better and features improve. This does not happen magically it happens through hard work, smart work, competition and more than anything else a customer base who will not settle for anything less.

    What is wrong with the rest of the world? Why cannot this happen in healthcare or auto manufacturing or…

    I despise the politicians and analysts and industry spokesmen and who spend their days trying to analyze and allocate and reallocate and ration and restrict and constrain healthcare costs without ever asking why do we spend so much and what can we do to lower costs. This will never occur top-down. No technology company CEO says I can sell my product for less so I am going to be a nice person and reduce my price. The technology buyer tells the CEO that if the price does not drop, if quality does not improve, if new features are not added then he/she will go somewhere else, use something else, find another way. This forces the company, screaming all the way, to reexamine how it does things and find better methods.

    There is no reason medical care should cost so much. Most of it is rather mundane (talking with a doctor, sitting in a bed, …). The problems have not changed (people being what they are). Most medical “technology” is not that new.

    Something is deeply wrong.

  10. How about making the Senior Citizen Employment Program open-ended so anyone 55 or older willing to work half time at the minimum wage at a non-profit organization can have one of those Senior Aide jobs and keep it as long as he/she can’t find something better and remains in good enough shape to remain in the Senior Aide job? Quite a few seniors would be willing to settle for that instead of a social security pension. As for terminal illness–IF (big if) you can tell when someone is within six months of dying anyhow, they are quite likely to be in pain and disabled and be almost relieved to be offered hospice care instead of aggressive attempts to prolong their lives a pitiful few weeks or months when they are too sick to enjoy life anyhow.

  11. Pingback: The Administration’s flawed health care argument threatens their fiscal policy strategy | KeithHennessey.com

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  13. A few notes – Arn't the Boomers going to die?
    Didn't they have a lot of kids that are now about 25 years old and have 40 years of earning and production years ahead at an extremely high productivity rate?
    Didn't the boomers for all their working lives borrow and spend more than they produced?
    Being that this group of selfish people lived their lives using houses and cars that they refused to work to pay for, how much can we worry about the fact that we will as a nation run low of resources to care for them?
    If we do need more people to care for the boomers, couldnt we just continue to import more 20 year olds to be their low cost nurses and caregivers?
    Won't the boomers kids pay for their care? Last we checked there are still 2 kids per boomer couple, and the boomer men are going fast because of their McDonalds habits.
    Hopefully the boomer kids will be a little more careful.

  14. Don't we have 10% unemployment, too many houses in Florida and arizona, and too many boomers.
    Instead of asking them to work longer, wouldnt it make sense to let them retire, give them one of those empty florida homes for a low price, and let their kids get jobs in the workplace?
    Why would we want the boomers to work longer, when we cant find jobs for the young ones coming up in the world, after all, when young people can't get jobs – they cause trouble.

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