February 20, 2023
The New York Times had an interesting piece on aging societies in Asia and elsewhere. The piece rightly points out that as the elderly comprise a larger share of the population, societies will have to make adjustments to meet their needs. This is not some sort of crisis, as it is often portrayed, by rather a challenge that has to be recognized, similar to other challenges posed by past demographic changes.
The NYT piece noted that older people are likely to need more medical care than younger adults. Also, many will face chronic conditions like dementia, which will be difficult to deal with, especially for those without children or other family members to help them. It also pointed out that many older people are forced to work late in life because they don’t have a sufficient income on which to retire.
These are real and important problems, but this will not be the first time that demographics has created a burden for the country. Specifically, the baby boomers imposed a major burden on the country when we were young.
The baby boom cohorts flooded the schools in the years from 1950 to 1982, leading to an enormous increase in spending on elementary and secondary education. In 1946, before any baby boomers had entered kindergarten, government at all levels spent less than 1.3 percent of GDP on K-12 education. This figure rose rapidly through the 1950s and 1960s, peaking at 3.8 percent of GDP in 1970. It then leveled off and edged slightly downward in the 1970s and early 1980s as the cohorts that followed the baby boom were somewhat smaller. This pattern is shown below.
Source: Bureau of Economic Analysis and Statistical Abstract.
This increase in spending on K-12 education of 2.5 percentage points of GDP over 24 years is considerably larger than the 1.8 percentage point projected increase in spending on Social Security in the forty years from 2000 to 2040. Also, as many began to attend college in the mid-sixties, there was an even larger increase, in own percent, in spending on college education, by both government and households.
Of course, the huge influx of baby boomers into schools created problems. I remember my second grade class in Chicago had fifty kids. They also put mobile classrooms into our playground, since the school had more kids enrolled than the building could accommodate. And, there were tax increases to cover the costs of educating more children.
And, paying for schools was just the start of it. Young children had to be looked after. At the time, formal child care was rare, so this responsibility typically fell to parents (generally mothers) and other relatives.
Responsibility for raising children kept tens of millions of women out of the labor force. In the 1950s, labor force participation rates for women between the ages of 20 to 24 averaged around 45 percent. Currently, they are over 70 percent. For women between the ages of 25 to 34, labor force participation rates rose from the mid-40s in the 1950s to peaks of over 78 percent in recent years. This translated into hundreds of millions of lost work years from the standpoint of the paid labor market.
In short, the baby boom cohorts imposed a major burden on both the government and families when they were young. Nonetheless, the decades of the 1950s and 1960s were periods of general prosperity, which saw rapid economic growth that was widely shared across the income distribution. Dealing with an enormous growth in a dependent population of young children did not prevent substantial economic progress.
The Burden of An Aging Population
This short discussion of the baby boomers’ youth is helpful in thinking about the burden posed by an aging population. Just as was the case with the young baby boomers, we will have to reallocate resources to meet the needs of aging baby boomers. It is far from an impossible burden if dealt with intelligently, but clearly it will impose costs.
Most immediately we will have to divert a large share of national income to support a growing population of retirees. We are already far along this path. The increase in the share of GDP going to Social Security between 2000 and 2023 is larger than the projected increase between 2023 and 2040, so this is clearly a manageable burden.
There is an issue that the Social Security trust fund is projected to face a shortfall starting in a bit more than a decade. This is a problem of allocation, not a direct drain of resources. The amount of resources needed to support the elderly population is determined by the number of elderly. We have been meeting this burden without major strains for well over a decade. Our economy can continue to do so, however, we have to decide how to allocate money to the Social Security program.
We can do that with designated taxes, as we have done since the program was created, or we can allocate money from general revenue. This is a political choice, but from an economic standpoint we clearly have the resources to pay benefits.
There is also a question of whether the benefits should be raised. The New York Times piece described incidents where elderly people were doing physically demanding jobs, presumably because they could not afford to retire. A modest increase in Social Security benefits (10-20 percent), for lower income retirees, would carry a relatively small price tag. This would make a large difference in the retirement prospects for lower paid workers, and mean that fewer would be forced to continue working late in life or when they are in bad health.
It would also help enormously if we could have serious discussions of tax increases, and not just for richest one percent. (We should definitely increase their taxes.) The Social Security tax was increased repeatedly over the five decades following its inception, from 2.0 percent in 1937 to 12.4 percent in 1990. It has not been increased at all in more than thirty years.
Part of the reason it was possible politically to increase taxes so much was that, at least through the first thirty-five years of the program’s existence, real wages were rising at a healthy pace. Taxing away a portion of the wage gains workers receive every year is an easier matter than asking workers to give up a portion of paychecks that are stagnant or even declining.
Fortunately, it appears that real wages are back on an upward path. Beginning in the middle of the last decade, real wages were rising at a rate of close to 1.0 percent annually for the typical worker. Pandemic inflation briefly stopped this growth, but it appears that real wages are again rising, especially for those in the bottom portion of the wage ladder. If this trend continues, modest increases in Social Security taxes should be a possibility, if that proves necessary.[1]
Getting Health Care Costs Under Control
A big part of the story of making the burden of an aging population manageable is getting our health care costs under control. The scare stories of the economy being crushed by a flood of retiring baby boomers were actually more a story of exploding health care costs than an increase in the ratio of retirees to workers. The proponents of the scare stories were simply being dishonest. Unfortunately, because of their standing in policy circles, their scare stories were taken seriously by the media.[2]
Fortunately, health care costs have not risen anywhere near as much as projected. In fact, in the last few years they have actually fallen slightly as a share of GDP. Nonetheless, we still pay more than twice as much per person as the average for other wealthy country countries. If we can get our health care costs closer to OECD average, it will make it far easier to care for a growing elderly population.
The basic story of our health care is that we pay far more for just about everything than people in other wealthy countries. The most glaring difference is with prescription drugs, where we often pay two or three times as much, for the same drug, as people in Europe and Canada.
The reason for this disparity is that we give drug companies patent monopolies, or related protections, and then, unlike any other country, tell the drug companies they can charge whatever they want. Every other wealthy country has some sort of price regulation that goes along with these government-granted monopolies.
We can get our prices down by adopting the same sort of restrictions on patent monopolies that Europe and Canada have. We will spend around $550 billion this year on prescription drugs. This is equal to 2.2 percent of GDP or more than 60 percent of the military budget. If we got our prices down to European levels we would pay around half of this amount. There is a similar story with medical equipment, although we only spend around $200 billion a year there.
Even better than reducing our payments for patent-protected drugs, we can stop relying on patent monopoly financing altogether for the development of new drugs. We can pay for the research upfront, as we did with the development of Moderna’s Covid vaccine. (We also allowed them to maintain a monopoly on the vaccine, in effect paying them twice.)
The government already spends over $50 billion a year on biomedical research through the National Institutes of Health. We could substantially increase the amount of public funding, but add the provision that all the drugs, vaccines, and other products developed must be fully open-source, so that they could be sold as cheap generics from the day they are approved.
We already have a great example of this model. Peter Hotez and Elena Bottazzi, two highly respected researchers at Baylor University and Texas Children’s Hospital, developed a simple to produce, 100 percent open-source Covid vaccine. It uses well-established technologies that are not complicated (unlike mRNA). Their vaccine has been widely used in India and Indonesia, with over 100 million people getting the vaccine to date.
Their vaccine sells for less than $2 a dose in India. If the FDA were to approve it here (it would likely cost around $10 million for the clinical trials needed to get approval) it would probably sell for less than $5 a shot. This compares to $110 to $130 dollars that Pfizer and Moderna want to charge for their boosters. If we got 100,000 people to take the Hotez-Bottazzi vaccine rather than the Pfizer-Moderna shot, it would cover the cost of the trials. If we got 1 million to take their vaccine it would cover the cost ten times over, and if ten million people took their vaccine it would cover the cost one hundred times over.
It is not just money we would save by going this open-source route. The huge markups that drug companies can charge due to patent monopolies give them an enormous incentive to lie about the safety and effectiveness of their drugs. We see this problem all the time, most notably with the opioid crisis where drug companies deceived doctors about the addictiveness of their drugs.
Another prominent example is the Alzheimer’s drug Adulhelm. Biogen, the manufacturer of the drug, was pushing the FDA for an accelerated approval, in spite of limited evidence of its effectiveness and serious harmful side effects. Their plan was thwarted after the resignation of several members of an FDA advisory committee. Biogen had planned to sell the drug for $56,000 for a year’s treatment. If Adulhelm was developed with open-source funding, and would be sold as a cheap generic upon approval, there would have been little incentive to try to get the FDA to ignore concerns about the drug’s safety and effectiveness.
Open-source drugs would also have a substantial impact on income inequality. The people who benefit from patent monopolies and related protections are almost all in the top 10 percent of the income distribution and many are in the top one percent. Forbes magazine calculated that the Moderna vaccine alone created five billionaires.
Aging Is a Distraction
We should recognize that the aging of the population will pose problems, but these problems are not qualitatively different, and almost certainly smaller in size, than the problems created by the baby boom cohorts when they were young. These problems are dwarfed by the problems created by inequality.
They are also aggravated by inequality. In a less unequal society, tens of millions of people would approach old age in better health. This is not only good for them, but it also means that paying for their health care would require fewer resources than if we continue on our current track.
Obviously, those who benefit from the extreme inequality we see at present would prefer that policy instead be focused on aging, as though this is a crisis. But their interests do not change the reality.
[1] Many economists, most notably former Treasury Secretary Larry Summers, have argued that the biggest problem facing an aging society is “secular stagnation.” This is a story where there is not enough demand to keep the economy operating at its potential and to keep workers fully employed. This is 180 degrees at odds with the story that we won’t have the resources needed to support a growing elderly population. If Summers’ secular stagnation view proves correct, then there would be no reason to have tax increases, since the economy is suffering from too little demand, not too much.
[2] The classic work in this vein was Peter Peterson’s mid-nineties gem, Will America Grow Up Before It Grows Old: How the Coming Social Security Crisis Threatens You, Your Family, and Your Country.
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