Now that Herman Cain has made an unceremonious exit from the presidential race, and as the Iowa straw poll nears, the economic debates continue to miss the fact that a national recovery cannot occur unless the states fix their individual economies.
Not all states are equally responsible for the economic meltdown, of course, as Michael Lewis recently pointed out; but California in particular embodies and exaggerates the mistakes that led to the Great Recession. To get the country back on track, the Golden State and the world's ninth largest economy (just behind Italy and ahead of India) will have to grow.
The pension system is driving California further into its fiscal mess. Entire cities have basically been shut down because no one can afford to pay what was irresponsibly promised to civil workers in decades past. Yet, as new research by the Stanford Longevity Center and the Milken Institute show, California is in a better position than many other states when it comes to paying out entitlements to its aging population.
The state is young, relatively speaking. Its immigrant population – especially the Hispanic population – is keeping down the overall age of Californians. Nearly half of the under-19 demographic segment is Hispanic. Yet California is still aging (as are the United States and the rest of the G-20 nations). From 2000 to 2010, the fastest growing population segment in the state was among those over 65, and the largest gross growth occurred among those ages 45-64. Though the 45-64 segment is still considered of “working age” – and therefore still contributing the lion’s share to the entitlement bank – soon this population bulge will reach traditional retirement age and start expecting the benefits they’ve been paying for during their decades of work.
Lowerfertility rates today than in the past also virtually ensure that California’s 21st century will be challenged if it tries to keep the traditional work-retirement structure. This profound structural dilemma is faced as well by the rest of America, most of Europe, and a growing number of countries in Asia, from Japan and South Korea to China and Singapore.
Is this a ticking time bomb? Absolutely – unless California can reinvent its entitlement system. Last year, state-subsidized medical treatments accounted for almost $14.7 billion, an increase of 18 percent from the previous year. If figures like this one already suggest bankruptcy, what will happen as the population continues to age and as the antiquated social system continues to write checks for which the state has no funds? What’s more, soon California will go from one of the youngest states to one of the oldest. The demographic segment that’s currently carrying the state will soon turn into the pension-drawing segment. And if immigration reforms limit the number of incoming workers, then the working-age population in California will shrink and even fewer will pay into a pot that’s meant to support tens of millions of seniors.
The California quagmire poses two major questions for our presidential hopefuls. One, how will national economic recovery plans demand that states get their fiscal affairs in order? And two, how can we create a new initiative for longer working lives in this century? If the 20th century was about expanding entitlements, the 21st must be about expanding work. The states can be great laboratories for the good and the bad. Speaker Gingrich certainly knew this in the ‘90s, when experiments on welfare reform in the states led to a national consensus from which the country is still benefitting.