December 23, 2012
Fareed Zakaria is very unhappy that “The American Left,” by whom he means the vast majority of people across the political spectrum who oppose cuts to Social Security and Medicare, insist on taking arithmetic seriously. They are refusing to join Peter Peterson and his wealthy friends in the Campaign to Fix the Debt in their crusade to cut these key social insurance programs.
Zakaria tells readers:
“The American left has trained its sights on a new enemy: Pete Peterson. The banker and private-equity billionaire is, at first glance, an obvious target—rich and Republican. He stands accused of being the evil genius behind all the forces urging Washington to do something about the national debt. …
The facts are hard to dispute. In 1900, 1 in 25 Americans was over the age of 65. In 2030, just 18 years from now, 1 in 5 Americans will be over 65. We will be a nation that looks like Florida. Because we have a large array of programs that provide guaranteed benefits to the elderly, this has huge budgetary implications. In 1960 there were about five working Americans for every retiree. By 2025, there will be just over two workers per retiree. In 1975 Social Security, Medicare and Medicaid made up 25% of federal spending. Today they add up to a whopping 40%. And within a decade, these programs will take up over half of all federal outlays.”
Yes, the facts are hard to dispute. That is why those of us on “the American Left” try to use them wherever possible. As Zakaria points out, apparently without noticing, we have already seen most of this aging disaster story. As he says, in 1960 there were about five working Americans for every retiree. Currently the number is less than three. It is projected to fall to around 2 workers per retiree by 2030 or “just over two” if we prefer Zakaria’s 2025 date. And the big three programs grew from 25 percent of federal spending to 40 percent between 1975 to 2010, they are projected to rise another 10 percentage points in a decade.
Apparently Zakaria missed it, but this sharp decline in the ratio of workers to retirees did not prevent us on average from enjoying a substantial rise in living standards over this period. Of course the gains were not evenly distributed because of policies that redistributed income to people like Peter Peterson and his friends in the Campaign to Fix the debt (e.g. trade policy, anti-union policies, deregulation of the financial sector — the fuller story is available here). However per capita after-tax income is more than twice as high today as it was in 1960, in spite of the scourge of a growing elderly population.
The reality known by arithmetic fans everywhere is that even modest gains in productivity growth swamp the impact of demographics. Here is the story for the years from 2012 to 2035, the peak stress of the baby boomers retirement.
Source: Author’s calculations.
Note that even in the most pessimistic productivity story, the slowest rate of productivity growth of the post-war era, the impact of productivity in raising living standards is more than three times as large as the impact of demographics in reducing them. Furthermore, this takes 2035 as an endpoint. After that year there is little projected change in demographics for the rest of the century whereas productivity will continue to grow.
Of course it is worth noting that our broken health care system can impose a serious burden on the economy. We already pay more than twice as much per person for our health care as do people in any other wealthy country with little to show for it in terms of outcomes. If the gap rises to a factor of three or four to one as some projections show, then it will impose a serious problem for the budget and the economy. However the answer is to fix our health care system, not to get angry at people for growing old.
The American Left is very willing to face the facts and look at the arithmetic. Unfortunately Mr. Zakaria and his editors at Time Magazine don’t have the same interest.
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