May 9, 2005
The albatross myth: boomers need not bankrupt usBy Jeff Goldsmith
The advance patrol of the 76 million baby boom generation reaches age 65 in the year 2011. Catastropharian pundits and forecasters are already warning about a 'demographic time bomb' and a potential doubling of our tax burden to care for them. In early September, 2004, Alan Greenspan joined the doomsday chorus, urging cutbacks in funding for seniors before the crisis arrives.
Much of the current debate about the future of Social Security is premised upon a presumed crisis created by baby boomer retirements. Yet there is a fundamental disconnect between what policymakers assume boomers will be doing and what they actually plan on doing relative to retirement. And the fact that current reform proposals offer virtually nothing to most boomers than the prospect of benefit cuts and higher taxes has stranded the Bush administration and other reform advocates in a sea of puzzlement and disbelief.
You may legitimately blame the baby boomers for many things: polyester leisure suits, disco, the Eagles, bad hair, and a truly uninspiring crop of politicians. But you heard it here first: the baby boomers are not going to bankrupt our economy unless we actively encourage them to do so. Thinking creatively about how to manage this rising tide of older Americans will help save us a lot of grief and potentially trillions of dollars later on.
Age 65: The Social Maginot Line
The immediate concern lies with our society's version of the Maginot Line: age 65. The boomers reaching this line will be the next great non—event in our society after Y2K. This line was engraved in political systems more than 120 years ago by Count von Bismarck, who chose this age of entitlement to social benefits in part because so few Germans of that vintage actually reached it.
Our own social safety net for seniors, Social Security, was erected on this venerable scaffold more than seventy years ago, when average male life expectancy was only 57 years. Medicare, the popular health services extension of this safety net, turns forty this year! When these programs were enacted, the elderly were manifestly in need of social protection. Many were frail and poorly educated. They also had limited assets and low incomes, more than thirty percent living below the poverty line.
Boomers approach this Maginot Line with a very different health status, attitude and resource position than their fragile forbearers. For all the political voltage that courses through it, age 65 is increasingly meaningless for most boomers. For them, age 65 will neither define neither the end of work nor the beginning of illness.
The gerontologist's nightmare vision of science providing us a longer life at the price of a lengthy period of disability and dependence on others at the end of life does not appear to be materializing. Instead, disability among those over sixty—five has declined at a steady 2.5% per year for the past two decades in most western countries including our own. According to the gerontologist Kenneth Manton of Duke University, there is evidence that this improvement in health among older people is actually accelerating. In 1998, 62% of Americans over sixty—five reported their health to be good or excellent, up from 46% twenty years earlier.
In the face of these improvements, it should not be surprising that the vast majority of boomers (upwards of 80% according to AARP surveys) plan on working past age 65. (These surveys prompted AARP to change their name, de—emphasizing the term 'retired' in their public image).
For some boomers, with limited or non—existent pension support, continuing to work past age 65 will be a matter of sad necessity. One—third of boomers lack retirement funding other than Social Security. But for millions more boomers, continuing to work will be a function of attachment to what they do, and to those who do it with them. Some 84% of boomers plan to work even if they have the financial resources to be 'set for life'. While some will work part—time, or take the opportunity to refocus their work on community service, a surprising number of boomers plan to work for themselves or for new enterprises they create. Work is in the boomers' blood.
Tens of millions of boomers will have the resource position to do what they wish. According to another AARP study, the 'early' boomers, those born between 1946 and 1955, will have an average household net worth at age 67 of $854 thousand, including home equity, some 53% higher than that of current retirees. This average is not only a consequence of widespread ownership of stocks and the appreciation of real estate values, but also the transfer of a staggering $10 trillion in inherited wealth from boomers' parents.
Early last year, gerontologist Ken Dychtwald wrote, in a widely read article in the Harvard Business Review, 'It's Time to Retire Retirement.' The social case for 'retiring' retirement is strengthened by the fact that retirement doesn't appear to be sitting all that well with those currently retired. According to Dychtwald, the typical retiree watches 43 hours of television a week. Health status of retirees deteriorates sharply with a more sedentary lifestyle. More than half of current retirees say that they would rather be working, and one third of those who retire before age 55 return to work. The 'Golden Years' vision of retirement has been a failure, prompting boomers, who have witnessed their parents' lost decades at the end of life, to search for alternatives.
How Do We Replace Them?
Not only do boomers not want to cease working, we cannot afford for them to do so. The most important task facing policymakers today is not the need to 'reform entitlements,' so much as to end the tacit or explicit bias toward encouraging retirement in our tax and pension systems. When Social Security was enacted, the country was mired in depression.A hidden agenda of Social Security was to clear the labor market, in order to create new jobs for younger people.
The reality of today's labor markets is markedly different from that of seventy years ago. According to the Bureau of Labor statistics, the US economy faces a shortfall of nearly 10 million workers by 2010. Almost half of federal and state employees will be eligible to retire in the next decade. Almost half of the nation's air traffic controllers will reach mandatory retirement age in the next seven years. One fifth of today's teaching positions in elementary and secondary schools are already vacant, in advance of an anticipated wave of teacher retirements in the next decade.
There is a yawning gap between the skilled work force we need and the supply of younger skilled workers. So, if a significant fraction of boomers want to continue working, and we cannot fill millions of their jobs, why would we want to continue social policies which either mandate or encourage workers to retire? If, as Peter Drucker and others have long argued, ours is a 'knowledge economy', why do we want knowledge workers to quit at the peak of their value and potential usefulness to society? It makes neither economic nor human sense.
Employers Can Help If We Let Them
There is a lot for employers to do to avoid being crippled by skilled worker shortages. Redesigning work roles and rethinking pension and health benefits policy are critical steps employers need to take now to make their companies friendlier to older workers.
Employers also need to rethink and redesign work roles, permitting or actively encouraging flex time, transitions to part time hours with full time benefits, six months on/six months off work schedules, and new emeritus and mentor roles. Companies should provide both financial and logistical assistance for retraining or refocusing older workers on new challenges. All these efforts will enable older workers to continue paying taxes and contributing to pensions, rather than drawing down our social accounts.
Pension policy urgently needs to be rethought, and not just because of the current federal pension insurance crisis. The last serious Congressional effort to examine pension policy was thirty years ago, in 1974, with ERISA. Filling the widening gap between private savings and social security is an urgent task, addressed only in part by recent tax law changes. It is not too late for many younger boomers, those in their forties, to begin building a retirement nest egg.
Current federal regulations penalize workers who reduce working hours, or accept lower salaries, by calculating their ultimate retirement benefits against the benchmark of most recent salary. Current IRS rules prohibit partial distributions until workers actually cease working, preventing retirement funds from being used to supplement or smooth out part—time or intermittent salaries. For example, workers who wish to work six months a year cannot legally draw on retirement savings the other six months. Creating the legal flexibility to encourage boomers to remain workers, either for themselves or others, may be a lot more beneficial for our economy than 'reforming' entitlement programs.
Rethinking Social Security and Medicare
The most daunting policy challenge posed by the boomers is restructuring Social Security and Medicare to encourage boomers to continue working and remaining covered by private health insurance as long as they wish to. Currently, these federal programs offer little flexibility for those who wish to continue working, and no integration with their existing private pension and health coverage.
Simply raising eligibility for Medicare and Social Security to 70, as some have proposed, could strand millions of less fortunate boomers who may lose their jobs well before age 70 and who lack savings or private pension coverage. One third of boomers have no means of income support other than social security, having less than $1000 in non—housing assets. Boomers with health problems, or who are engaged in onerous physical work, may not make it to seventy before requiring both income support and publicly funded health coverage.
On the other hand, means testing benefits would make a mockery of the 'social insurance' political premise of these programs. People who have paid 'premiums' for social security and Medicare for their entire working lives legitimately expect to get their contributions back in benefits when they are older. All who have contributed to these programs have political, if not strictly economic, 'equity' in Social Security and Medicare. Means testing would deprive many boomers of coverage they have paid for all their lives. Both strategies — raising the retirement age and means testing benefits — are coercive, and would deprive different grops of boomers of needed or earned coverage.
Who Should Receive Retirement Subsidies?
Americans need to have a discussion about who is entitled to be subsidized by the younger working population. Many retirees believe the entire benefits they receive from Social Security and Medicare have been paid for by their own contributions. This is manifestly false: the person who retires today will receive anywhere from five to eight times their contribution in lifetime Medicare benefits, and as much as three times their Social Security contributions in payments. These subsidies are drawn from younger workers.
Not only is there nothing inherently wrong with this subsidy; it is the essential logic of social insurance. However, it is unsustainable and inequitable for young people working in benefits—free service jobs to subsidize the incomes and healthcare of retired doctors and lawyers. It is time to end the feckless double counting of Social Security and Medicare payroll deductions, which permits both the current beneficiaries and current workers to believe that the actual cash they pay in or receive belongs exclusively to them. To manage these vast resources fairly requires us to honestly account for and allocate in a transparent fashion the huge intergenerational subsidies hidden in the current programs' financing.
This issue surfaced briefly during the debate over prescription drug coverage for Medicare, but did not affect the final design of the benefit. As this benefit was defined by Congress, workers at fast food chains are subsidizing billionaire Warren Buffet's prescription drug coverage, both through their payroll deductions and their income taxes.
A Flexible Benefits Approach to Social Security and Medicare
Beginning in the 1970's, many corporations adopted a flexible benefits model pioneered by Hewitt and Associates called 'cafeteria' benefits. The premise of cafeteria benefits is that workers and families differ, and that they should have flexibility in structuring how their receive benefits. (These benefits have grown so large as a percentage of salary that they are no longer appropriately termed 'fringe benefits'). A sensible social policy toward Social Security and Medicare would be to extend this cafeteria benefits philosophy to public income and health security programs.
In cafeteria benefits, workers have a wide range of options on how to structure their total compensation. Young workers may opt for lower pension contributions, and take more vacation days, or simply lower their benefits deductions and take home a bigger paycheck. Families with significant medical expenses may opt for a richer health benefit and lower retirement contributions, with a larger deduction for these items taken from their paychecks.
This cafeteria benefits philosophy is spreading rapidly to private health insurance.Under so—called 'Consumer Directed' health plans, employees can customize their health insurance coverage to fit their financial circumstances and health care needs. Those with chronic illnesses may opt for richer benefits and a higher payroll deduction for health insurance premiums, while healthier individuals may opt to assume more economic risk in exchange for lower deductions from their paychecks. Many of these plans offer first dollar coverage employing tax—free Health Savings Accounts (a movement encouraged by the Medicare Modernization Act of 2003), which roll over from year to year if families economize in their use of health services.
In both the traditional cafeteria benefits, and the newer Health Savings Accounts, power devolves to the worker and family to decide how much and what type of health benefits they receive. This power should be extended to publicly financed health and pension benefits: older Americans should be able to structure how they receive the public benefits they have paid for to fit their circumstances and needs.
Rather than giving Social Security benefits to those who do not need them, and taxing them away, as current policy does, why not encourage older workers to defer enrollment by making lump sum payments to supplement their retirement savings, or else raise monthly payments to them later on when they do retire, as the present law provides up to age 71? For people who have adequate private pension coverage, why not permit older workers to redirect some of their Social Security payments into funding private medical insurance or long term care insurance coverage?
On the Medicare side, why not let the older worker (if self employed) or their employer apply their Medicare salary deductions after, say, age 62 to subsidizing continued private insurance coverage, or use the funds to pay for private long term care insurance, the latter to pay for the chronic care services (like home health care or nursing home care) which Medicare presently does not cover? Alternatively, why not let the self—employed older worker, or their employer, buy into Medicare, by paying a tax—deductible premium, after the worker reaches age 55, if satisfactory private coverage is not available or attractive economically? This latter proposal was a part of John Kerry's 2004 health reform agenda.
Individuals should have the option of voluntarily deferring public benefits, or deploying their equity in either program to meet needs unmet by their private coverage. Older workers should have access to some of the financial contribution they have paid into the program during their working years, plus some appropriate return, to fill the gaps that exist in their private pension or medical coverage. Those with limited financial resources, or who have limited incomes, would continue to receive some multiple of their contribution (that is, subsidy from the working population) as they do now. Universality of benefits does not mean that everyone has to receive the same benefits regardless of their needs or circumstances.
This strategy does not prejudge the merits of encouraging younger workers to allocate some of their present Social Security contributions to personal investment accounts. Indeed, we should explore whether some of the savings achieved from voluntary deferral of public benefits to older Americans could be used to fund the financing gap created by encouraging younger workers to manage some of their own Social Security funds in private accounts.
Entitlement Politics May be Losing Its Appeal
Simply assuming, as many pundits do, that boomers will use their power at the ballot box to vote for politicians who increase benefits to them, or punish those who reduce them, as their parents and grandparents did, makes some heroic assumptions about boomers' relationship to the political system. Entitlement politics is unlikely to ignite the same political passions among boomers as it did among their parents and grandparents.
The venerable New Deal stratagem of paying off influential voting blocs with public benefits financed with borrowed dollars may finally have reached the point of diminishing political returns. That is certainly a conclusion one could draw from the recent Presidential election cycle. The recent efforts to add prescription drug benefits to Medicare actually proved a political negative to the Bush administration, as the benefit has been thusfar unpopular both with seniors and the general public. Young people did not increase their voter participation to support the Democratic presidential candidate John Kerry's promise to provide them health insurance. If they had, John Kerry would be president today.
The most striking political attitude of the boomers is an enduring and powerful mistrust both of political leaders and social institutions. This mistrust was forged in their adolescence and early twenties by the twin crises of Vietnam and Watergate. In 2002, only 6% of boomers trusted what their political leaders told them, compared with 3% for the same age cohort in 1970. Those very confident in Congress, which would have to vote benefit changes or tax increases, actually fell from 16% in 1970 to about 13% in 2002. Boomers do not seem anxious to become passively dependent on government, or politically indebted to those who grant them public benefits.
Incidentally, this suspicion of authority unites boomers with another emerging voter bloc — recent immigrants to the United States. Many immigrants fled repressive, authoritarian regimes to come to the United States, and they brought with them a fundamental and deep—seated mistrust of government programs. This legacy of mistrust may be an explanation of why one—third of the nation's Hispanic or Latino populations lack health insurance, even though many are eligible for Medicaid. Becoming dependent on a new central authority is not high on the agenda of those newly arrived in the United States.
Boomer suspicion of authority has found particularly intense expression in their
If the managed care backlash is any guide to the future political debate, boomers are going to want choice and flexibility in their Medicare coverage, and for public benefits to integrate better with their private plans and coverage. They are not going to welcome or embrace a one—size—fits—all program, financed by progressively underpaying their doctors and hospitals.
Social Security and Medicare Reform: 'What's in it for the Boomers?'
Eventually, all boomers are going to reach the stage of life where they need a great deal of care and cannot continue working. This is the biggest long term fiscal risk: the inevitable time when boomers reach the age of multi—function chronic illness, battling arthritis, Alzheimer's and a host of other afflictions simultaneously.
This chronic illness—driven health cost crisis will commence in earnest when the front edge of this generation begins turning eighty around 2025 (particularly if we cannot make meaningful progress in understanding and controlling Alzheimer's Disease). Many boomers also carry the burden of obesity into their senior years, clouding the prospects for continuing gains in health status among the elderly.
Sooner rather than later, we will need to retool Medicare to deal frontally, and in an evidence—based scientific fashion, with multi—functional chronic illness. We must tilt Medicare payment away from hospital—based acute care toward home— and community—based primary care, and toward the management of disease risks. We will also need to have changed the inflationary, 'a'la carte' payment approach to hospitals and doctors which drive the current program. The fiscal risks of not making these sensible changes are far larger than not reforming Social Security.
However, our most urgent near term challenge is to reframe Social Security and Medicare to encourage those who wish to continue working (and paying taxes). We must also rationalize the social subsidies buried in these programs to focus them on those who need them the most. The largest reason why Social Security reform has stalled is because there is nothing in it for boomers, other than the risk of higher taxes and benefit reductions. Unless boomers become convinced that these programs can be improved to help them, meaningful Social Security (or Medicare) reform is unlikely to be enacted.
With some creative thought, policymakers could turn trillions of dollars in present value liabilities related to these programs into assets for individuals and society by actively encouraging continued employment by boomers. We must end the bias toward retirement in our private pension and social insurance programs. We should also encourage people to take steps to delay the onset of disabling diseases, and try to add a decade to the productive life of American workers. These two goals reinforce one another: healthier people will continue wanting to work, and actively engaged older people will remain healthier longer.
Simply to pretend that all older Americans are the same, and the same as those fragile, financially strapped elderly for whom Social Security and Medicare were originally created, is to blind us to the need to make changes in our social policies toward older Americans while we still have the flexibility to do so. Boomers are not looking for handouts. What the United States needs is a flexible, pro—work social policy which encourages more older Americans to remain taxpayers and contributing members of their communities, and defers or eliminates the need for them to be passive, dependent wards of the state.
Jeff Goldsmith, PhD is president of Health Futures Inc. and Associate Professor of Medical Education at the University of Virginia Medical School.