You Can't Cap Demographics

You Can't Cap Demographics

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No element of the Fiscal Commission co-chairmen’s mark has set off more controversy than their call for a federal budget cap. The critics are right to attack the arbitrary cut-off point, which was set at 21 percent of gross domestic product. But they’ve got their reasoning wrong.    

Paul Krugman of the New York Times zeroed in on the cap at the top of today’s column dismissing Erskine Bowles and Alan Simpson’s handiwork. “This is a guiding principle?” he asked. “Why is a commission charged with finding every possible route to a balanced budget setting an upper (but not lower) limit on revenue?” He went on to attack the cap as a foil for increasing taxes on the middle class while lowering taxes for the well-to-do and corporations.

Who benefits from the tax changes contained in the proposal is an important question, but it is a non-sequitur when it comes to discussing the ideal size of government. The federal government is going to grow in the coming decades no matter what, and that’s because of the aging of America. That demographic destiny has already been written and any deficit plan that fails to take it into account can fairly be accused of being a thinly veiled effort to limit the size of government by arbitrarily reducing programs aimed at seniors.

Henry Aaron of the Brookings Institution touched on this issue in his blog post for The Fiscal Times earlier today. The steady-state spending level proposed by Bowles and Simpson “is lower than spending averaged from 1980 to 2008 when none of the baby boomers had yet retired and claimed Social Security and Medicare.”

Memo to Dr. Aaron. This isn’t just about the baby boomers.

Let’s review the demographics. The first baby boomers started receiving (early) Social Security benefits in 2008. That group begins turning 65 next year.

In that cross-over year of 2008, there were 38.7 million Americans over 65 or 12.7 percent of the population. By 2050, the point in time when most of the 77 million-member Baby Boom generation will be dead, the population over 65 in America will more than double to an estimated 88 million or 21.5 percent of the population. The number of people over 85 will more than triple to 19 million – half the number of people at retirement age today.

Why? Life expectancy is expected to continue its upward crawl, while the number of young people will continue falling as a proportion of the total population. This is happening in every advanced industrial nation and even most of the middle-income nations like China and India.

The Census Bureau predicts life expectancy, which was 76.7 in 2000, will climb to 83.1 by 2050. At the same time, the number of young people in society who are under 20 will have fallen from 27.2 percent of the population (2010) to 24.9 percent (2050).

And that, according to S. Jay Olshansky, one of the nation’s leading demographers at the University of Illinois at Chicago, may be underestimating the extent to which society will gray. His MacArthur Foundation-funded program estimates the Census Bureau may be shorting life expectancy’s growth by 3.1 to 4.5 years and offers even one scenario – where the money being poured into research to extend life by delaying the aging process has some success – extends life expectancy by 7.9 years.

By his reckoning, the Social Security and Medicare expenditures contained in the government’s medium-term projections are anywhere from $3.2 trillion to $8.3 trillion underestimated. “We believe the reason for this underestimation is that government agencies assume the improvements in mortality in the coming decades will decelerate, whereas we forecast that a combination of control of behavioral risk factors and new advances in medical technology that slow aging will accelerate reductions in death rates,” he wrote in a recent paper for the Milbank Quarterly.

Obviously some adjustments need to be made to entitlement programs as societies succeed in lengthening their life spans (taking into account that not all segments of society enjoy the fruits of that extension equally). But any program that wants to bring long-term budgets into balance must take into account the fact that the federal government is responsible for providing income support and health care for its aging citizens.

The Pew Fiscal Analysis Initiative had an interesting chart in its report released earlier this week calling for early action on the Social Security shortfall. It showed that the working age population only declines by a few percentage points between now and 2050. In other words, more than half of the rise in the senior population is offset by a decline in people under 20.

When it comes to thinking about an appropriate level of societal spending on dependent populations, we need to throw education, child care and other programs aimed at the young into the mix. Alas, most of those are supported by state and local government, which wouldn’t be affected by an arbitrary and poorly thought out federal spending cap.

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spent 25 years as a foreign correspondent, economics writer and investigative business reporter for the Chicago Tribune and other publications. He is the author of the 2004 book, The $800 Million Pill: The Truth Behind the Cost of New Drugs.