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Home Publications Blogs Beat the Press The Demographic Crisis Ain't What It's Cracked Up to Be: Thomas Edsall Edition

The Demographic Crisis Ain't What It's Cracked Up to Be: Thomas Edsall Edition

Thursday, 17 January 2013 04:56

Thomas Edsall devotes his blog post this week to Walter Russell Mead and a number of others who tell him that demographic change is going to wipe out the welfare state. The problem is that the projections don't support this story. The impact of projected future demographic change on the budget is actually fairly limited.

In 2001 Social Security cost 4.1 percent of GDP (Table F-5). It current costs 5.1 percent of GDP (Table 3-1). Over the next two decades the cost is projected to increase by roughly the same amount as it did in the last dozen years. That doesn't seem like an insurmountable burden. In fact, if the projected shortfall in Social Security funding for the rest of the century were filled entirely through an increase in the payroll tax, the necessary tax increase would amount to 7 percent of projected wage growth over the next two decades and just 4.0 percent of the wage growth over the next 40 years. (This assumes that workers get their share of productivity gains, which is a key issue that has little to do with demographics.) The tax burden would be lessened insofar as part of the projected shortfall was filled by making the tax more progressive (e.g. raising the cap) or cutting benefits.

The rise in Medicare costs is projected to be larger, but this is due to the projected rise in per person health care costs, not demographics. (People don't age any more rapidly in the Medicare program than in Social Security.) This emphasizes the need to control health care costs, which are already more than twice as much per person in the United States as the average for other wealthy countries. This ratio is projected to grow to 3 or 4 to 1 in the decades ahead.

It is wrong to refer to the projected explosion of health care costs as a demographic issue. It stems from an inability to confront the powerful lobbies (drug companies, medical equipment companies and doctors) who profit from the waste in the U.S. health care system. The actual impact of demographic change is swamped by productivity growth. It is probably also worth noting in the context of this piece that the ratio of interest on the government debt to GDP is near a post-World War II low.


 Source: Social Security Trustees Reports and Author's Calculations.

This blogpost also refers to the projected shortfall in state and local pension funds, telling readers:

"Dozens of city and state public employee pension plans are on the verge of bankruptcy – or are actually bankrupt – from Rhode Island to California; in 2010, a survey of 126 state and local plans showed assets of $2.7 trillion and liabilities of $3.5 trillion, an $800 billion shortfall."

This $800 billion shortfall is less than 0.4 percent of projected GDP over the next 30 years, the time horizon in which most of these benefits are projected to be paid. That is less than one fourth of the increase in military spending associated with the wars in Iraq and Afghanistan or the additional money projected to flow to the pharmaceutical industry as a result of government granted patent monopolies.

Comments (5)Add Comment
written by Jennifer, January 17, 2013 7:49
This assumes that workers get their share of productivity gains, which is a key issue that has little to do with demographics.

Kind of buried the lede there. I agree with you but every graph I have seen indicates this has not been happening and not happening for awhile and it seems there would have to some big policy changes to make it happen.
written by kharris, January 17, 2013 11:52
Context? We don't need no stinkin' context? Big, scary numbers are the perfect basis for making policy decisions. 'Specially if I get to choose the big, scary numbers.
Young Healthy People Don't Need Annual Doctors Visits
written by Robert Salzberg, January 17, 2013 1:26
It's an open secret in the medical profession that young healthy people don't need an annual physical. The evidence that we shouldn't keep paying for them is building:

written by watermelonpunch, January 17, 2013 4:25
@ Robert Salzberg
At the risk of following you off on a tangent here... and sounding like I'm poo-pooing your link for the heck of it..

They're talking about CANADA.

I don't think you've found the holy grail here in terms of healthcare inefficiency & waste in the U.S. Especially not yet.

Not when you have a hospital ER room taken up for 4 days with a suicidal mental patient being held without a shower or a toothbrush, but with their own dedicated constant security guard being paid hourly, on watch... because the system failed to allow the person to be treated for depression in a less expensive preventative way, and failed to provide them a bed in a therapeutic environment designed for their condition, requiring much less individual attention & expense than a trauma unit.

(Yes, this happened this week at a hospital ER, as witnessed by 2 of my family members.)

While I'm sure there's validity that a yeah-you're-okay check-up is not strictly necessary for healthy young people...

I think it misleads from the fact that IN OUR COUNTRY, lack of regular doctors visits is what pushes up healthcare by pushing those people into the ERs and resulting in seriously lesser quality of care, and higher cost of care, for everyone, including the medicare covered elderly person in the ER because they had a heart attack last year and need another emergency stent put in.

In short, Canada may or may not have a problem with wasting money on preventative care.

But I think we in the U.S. have the opposite problem completely.

And therefore this is NOT really a convincing argument to stop having insurance cover "routine doctor visits" in the U.S.

Unfortunately, sometimes PURPOSE-DRIVEN office visits get (inappropriately) billed as "routine", when in fact they are NOT strictly a "you're okay check-up".

For example, I've heard about & read about many cases where someone's insurance failed to pay for an office visit because it was classified as "routine" despite the fact that they were there for something like a UTI that required prescription antibiotics... and which could have conceivably led to a weekend ER visit, with a true emergency. (Before antibiotics, people used to die from that sort of thing, so you can't say it's not life-necessary.)

At any rate, insurance companies looking to get out of paying these bills have often found ways to deem them "preventative" or "routine" in order to not pay. Thus the push for insurances to cover all office visits... so as not to let them try & sneak this in, deterring people from going to the doctor while the disease is at stage where it's more cost-effective to treat it, and better for the patient.

So sorry Salzberg, your link may be of interest to someone in Canada. I won't argue with that. But on this topic, regarding healthcare costs for older people, I think it's a red herring, and a dangerous one at that.
$800 billion ... about how much overspend each year on doctors, drugs, hospitals ...
written by Rachel, January 18, 2013 7:46

That's based on data from the McKinsey Global Institute, with their values updated for health care inflation. (Lots of inflation).

I understand the views of W, above, on the costs of our lack of timely health care. It's quite true that we are not so good at preventive care, and in a less distorted system, that might well account for a good share of our overspending.

But it only amounts to a small fraction of overspending on health in the extremely distorted and uncompetitive US system. The #1 reason for our high costs is the high cost of labor: lavishly rewarded doctors (and in some cases, like northern California, also nurses). The average GP makes four times the average income in the US, more than in anywhere other developed nation. Our drugs are too expensive, we've gone through a Radiation Boom, with very prodigal use of CT scans at very high prices (unlike, for example, Japan). We waste huge sums on incoherant administrative practices, more huge sums go to fraud, to overpriced drugs, etc.

And increasingly, we have the market power of big hospital chains, leading to more and more price inflation.

So although we have to sympathize with all the people who've suffered from the lack of compassionate and timely health care, this failing it isn't the main cost driver. The costs are too high mainly because all the goods and and services are overpriced. But the tremendously inadequate media in this country chooses not (and perhaps lacks the ability) to perceive this.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.