Reason for hope?

From a Sunday, July 6 Washington Post OpEd:

By Russell Beland The warnings have rumbled for decades: Just wait till the baby boomers retire. If you think there are strains on Social Security and Medicare now, brace yourselves for the implosion as the boomers start heading out to pasture. With the first of that generation now doing just that, we should be seeing the dust cloud soon, right? Actually, if you've bought into the following myths about the bust the baby boom is supposed to usher in, you may be surprised.

1. As boomers quit working and ease into their golden years, they could break the backs of the younger workers who will have to support them.
Not so. Even at the peak of boomer retirement, around 2030, most of the population will still be of prime working age, between 20 and 64. The percentage -- about 55, according to the Social Security Administration -- will be lower than it is today (59), but above the levels of the 1960s and '70s, when it ranged between 51 and 54 percent. Not only will a larger portion of the population be of working age than in the past, but a much higher percentage of that group will be available to provide goods and services. Forty years ago, most women didn't work outside the home; these days, about 60 percent do -- and the number keeps going up. In addition, national defense employed more than 10 percent of the workforce in 1968. Today, it uses less than 5 percent, freeing more workers for the general labor force. Future labor markets are likely to be tighter than they are today, but there's no danger of running out of workers.


2. We're running out of time to fix senior-citizen entitlement programs before a crisis strikes.
Actually, we're out of time. If it was politically impossible to solve this problem when the number of retirees was comparatively small, there's no chance for a major fix as the ranks of the elderly -- and their political clout -- grow. There may be some minor changes in the way benefits are taxed or adjusted for inflation, but it's already too late for any big fix. Some older baby boomers are already retired, and many more are getting close. Social Security and Medicare benefits are part of their financial planning, and we can't reduce them significantly now without a major breach of faith. If you think cuts in benefits are inevitable, remember that the only significant recent change to old-age entitlement programs was adding a prescripion-drug benefit -- which rang in a dramatic increase in government costs.


3. Boomers' retirement will be bad for the economy.
Not really. It'll be bad for the federal budget, sure, but it will actually be good for the economy as a whole. As retirees, the boomers will continue to buy goods and services, but they won't be competing for jobs. This will tend to push wages up, keep unemployment low and boost demand across the board. That's good news for an economy generally characterized by excess capacity in retailing and manufacturing and persistent unemployment. The biggest impact will probably be felt in the personal services sector, on which retirees spend a disproportionate amount. Many service jobs require little formal training, and most can't be moved offshore. The demand for drivers, cooks, gardeners and others will increase as the baby boomers age.


4. The politicians know what needs to be done; they just lack the will to do it.
They may lack the will, but they almost certainly have no idea what needs to be done. Estimates of future Social Security and Medicare spending are based on complex economic and demographic models that are quite sensitive to even modest changes in key assumptions. No one really knows the size of the problem facing the federal budget, and very few people understand all the moving parts. Take President Bush's failed proposal to allow private retirement accounts, which would permit younger workers to redirect some of their Social Security money into alternative investments. In the long run, this would partially insulate the government from swings in revenues and expenditures of the sort caused by the baby boom, but in the near term, it would make the government's cash-flow problems somewhat worse. Yet the debate over the proposal centered more on potential, largely imaginary financial risks to individuals than on the pros and cons of improving long-term viability at the expense of tighter budgets over the next couple of decades.
Even issues seemingly unrelated to baby-boom retirement could have significant indirect effects. If, for example, avian flu were to kill thousands of elderly Americans, as has been predicted, it would save Social Security and Medicare billions of dollars. That's not much of a silver lining, but it does highlight the complexity of the calculations.
On the other hand, imagine that some form of universal medical coverage somehow made it possible to provide quality, affordable care to virtually every American without spending any more on health care than the nation does now. Polls have shown that with nearly all workers becoming eligible for at least partial Social Security at age 62, significant numbers of workers would retire up to three years sooner if they didn't feel the need to wait for Medicare eligibility, which begins at 65. That's three fewer years of contributions to Social Security and three more years drawing out benefits. The added cost to the system would be billions of dollars. Universal health coverage might be worth the price, but no one includes that hidden cost in their calculations.


5. Saving the budget will require either major reductions in the old-age entitlement programs or major tax increases -- or both.
Actually, probably none of the above. Unless there are major changes in benefit rules or in the population, spending on Social Security and Medicare will grow dramatically over the next few decades. But many economic changes are likely to mitigate the effects on the budget. For example, as the workforce shrinks, the demand for labor will grow, pushing up wages and thus increasing payroll taxes, giving the government more income. Higher wages mean that more people are likely to choose to work, and to work longer before retiring. These changes, and many others like them, are likely to offset most of the increases in Social Security costs even without changes in tax rates. That will still leave a bill to be paid, but a manageable one. Medicare benefits are a much more complicated matter, but society is going to provide health care to the elderly one way or another. The issues there have more to do with how to provide that care and how expensive it will be than with who writes the checks.
So don't be too scared. Yes, the baby boom's retirement will strain the budget. But natural economic forces will take over, and combined with modest revisions in benefits and taxes, they should make it possible to keep those baby boomers grazing and the rest of us going in relative comfort and peace of mind.
Russell Beland is deputy assistant secretary of the Navy for manpower analysis and assessment.