Feds may have to save boomers from themselves
At age 78, Alan Greenspan could have been collecting Social Security and Medicare benefits for more than a decade. Lucky for us he keeps his job.
The chairman of the Federal Reserve Board has tried for 20 years to slap some sense into politicians who carelessly promise retirees will enjoy adequate health care and at least a modest income, but refuse to face up to the financial commitments that pledge entails. He was at it again Friday.
Greenspan focused on the likelihood that growth in the labor supply and productivity can sustain the kind of economic expansion the nation experienced in the 1990s. Today, the number of workers increases by about 1 percent annually. The pace will decline to just one-quarter of 1 percent by 2035. Only unforeseen levels of immigration can offset the nation’s declining birth rate, he said. The retiree population, meanwhile, will swell from 12 percent of the nation’s total to 20 percent.
Projecting productivity gains is trickier. Greenspan credits deregulation and globalization for some of the improvement through the 1990s. New equipment and smarter use of existing resources also contributed. But, asked Greenspan, how much new investment can a barely growing work force absorb? And if the return on capital declines, so too will our ability to attract foreign investment. Domestic savings will have to do.
Americans are abysmal savers. Greenspan noted the elderly are an exception. They are not spending baby boomer inheritances. If the boomers can restrain themselves when they come into their parents’ money, domestic savings may increase. But thrifty boomers, where they exist, cannot do it all.
“Critical to national savings will be the level of government, specifically federal government, saving,” said Greenspan, who then went on to offer only a disappointing choice between “promoting longer working life” — perhaps working into your late sixties or early seventies — or an ultimately counterproductive increase in payroll taxes.
Disappointing because the options do not stress how imminent are some of the problems.
Although Social Security’s financial future can be fixed with relatively minor adjustments, Medicare is a mess. In an annual message released in March, the trustees of the Social Security and Medicare trust funds pointed out the Hospital Insurance Trust Fund begins drawing down reserves this year, with total depletion by 2019. If that fund is to remain financially sound over the next 75 years, income must double or expenses must decline by almost half. Think how much that might add to the already sad financial state of Spokane’s hospitals.
Medicare payments to doctors, and for the new prescription benefit, known respectively as parts B and D, come out of the federal government’s general revenues. They consume about 9 percent of income tax revenues today. In 75 years, the share will be 50 percent. And premiums and copayments will consume 80 percent of Social Security benefits because increases in the cost of medical care far outstrip the overall inflation that determines annual increases in Social Security payments.
From less than 1 percent of gross domestic product today, the share parts B and D claim jumps to more than 6 percent in 75 years. In fact, funding for Social Security and Medicare will consume more than 20 percent of GDP in 75 years if no changes are made.
As Greenspan suggests, the sooner adjustments are made, the more likely these crises can be avoided.
Unfortunately, Greenspan made his remarks at a symposium in Jackson Hole, Wyo. He should have spoken in Boston last month, or in New York City this week, the better to underscore how hugely the looming problems overmatch proposed Democratic and Republican solutions.
Greenspan had another thought, too: “One policy that could enhance the odds of sustaining high levels or productivity growth is to engage in a long overdue upgrading of primary and secondary school education in the United States.”
“Tough policy choices lay ahead,” Greenspan concludes.
Do not hold your breath.