The Not-So-High Cost of Aging

If you heed the doomsayers, the graying of the U.S. population is a catastrophe. Look a little harder, and those fears are overblown

Author: Christopher Farrell

Published: July 16, 2004

We're getting older. By 2025, the share of the population age 65 and above will reach 19%, up from 12% in 2000. The elderly are living longer, too. In 1935, when Social Security became law, men and women age 65 could expect to live another 12 years and 13 years, respectively. Those figures are now 16 years and 19 years.

The graying of America is enough to send most public-policy analysts running for the medicine chest, seeking relief from visions of impending disaster: Spendthrift Americans aren't saving enough for their retirement. Social Security is hurtling toward insolvency. The health-care system is out of control. The aging of society is a demographic tidal wave that will swamp the economy.

REDO THE MATH. "I think we're heading for sizable tax hikes, benefit cuts, hyperinflation, and high interest rates," says Laurence J. Kotlikoff, economist at Boston University and co-author of The Coming Generational Storm. The phrase "we can't afford growing old" reverberates from gloomy Congressional testimony to somber economic conferences.

The fact that people are living longer is reason for celebration, not sorrow. It is one of the great accomplishments of the past century. In 1900, life expectancy at birth in the U.S. was 47 years. What's more, with the population better-educated and healthier than previous generations, the benefits derived from an aging society are far greater than the costs.

For one thing, the bulk of recent economic research into how well aging savers are doing to prepare for their golden years is far more optimistic than conventional wisdom. It's often overlooked that older workers can make up for any savings shortfall by earning a paycheck for a few more years. Take this calculation by economist Robert Shackleton. A married couple is in their early 60s need approximately $65,738 a year after taxes to replace 80% of their preretirement income (a common after-tax ratio calculation in the financial-services industry).

If they both retire at age 62, they'll receive a total of $25,284 in Social Security benefits and require a portfolio of at least $890,525 to generate the remaining income they'll need to maintain their standard of living to their normal life expectancies. But if they wait until age 66 to retire, their Social Security benefits go up, the time they need the money shrinks, and $551,548 in savings will suffice. Retire at age 70? A portfolio worth $262,962 should be sufficient.

MENTAL HEALTH. What is often overlooked is that older workers are valuable employees. Sad to say, much of the discussion surrounding aging is dominated by the idea of loss -- of productivity, energy, vision, and hearing. It's true that getting rid of a paunch gets harder as the years go by, and that a battery of ailments assaults the body. Yet researchers are finding that, on average, older people are less likely to be clinically depressed than younger people, including the middle-aged. Older people are more satisfied in their emotional relationships, too. And while younger workers are better at learning something new than the aged, other skills improve with the passage of time.

"Empirical findings suggest that the ability to solve everyday social problems is maintained or improves with age," write Laura L. Cartensen and Corinna E. Lockenhoff, psychologists at Stanford University, in an article published in the 2003 Annals of the New York Academy of Sciences. "In short, as they get older, humans seem to acquire advanced interpersonal skills that make them successful negotiators. They are able to appreciate different perspectives, assess complex interpersonal implications, and decide which course of action is most promising." Sound like qualities that make a good employee, no?

What we can afford as a society largely depends on the rate of economic growth. Here's an illuminating calculation from economist Paul Romer of Stanford University: The economy's underlying trend of growth between 1870 and 1992 was 1.8% a year (measured as income per capita). If that rate could be increased to 2.3% over the next half century, say through productivity improvements, the budget problems forecast for Social Security, Medicare, and Medicaid would disappear.

Certainly, Social Security will be there to help out, despite a drumbeat of negative news surrounding the retirement system. Yes, the demands of an aging population could push Social Security into insolvency in 2042, says the latest report by the Social Security trustees, or 2052, according to the Congressional Budget Office. The date of financial reckoning may be much farther off, however. There is a growing consensus among economists that the improvements in productivity growth over the past decade -- from around a 1% annual rate in the '70s and '80s, to a 3% pace since 1995 -- are here to stay.

RETURN ON INVESTMENT. Well, the baseline Social Security 75-year projection assumes the economy will expand at less than the 2% average annual rate. That's well below the 3.6% growth rate of the previous 75 years -- a period that includes the Great Depression -- points our Irwin Kellner, economist at Hofstra University. "Social Security doesn't have me worried," says William Gale, an economist at the Brookings Institution. "Its financial problems are solvable through any number of small adjustments to benefits and taxes."

What about health care? Clearly, the current system is dysfunctional, with medical-insurance premiums skyrocketing at double-digit rates in recent years and more than 40 million Americans lacking coverage. With the patchwork quilt of public, private, and nonprofit organizations badly frayed, the health-care system is in desperate need of reform.

Nevertheless, the notion that a rising health-care bill will bankrupt the nation is wrong. The return from increased medical spending is enormous, measured in quality of life and productivity. That's what Harvard economist David Cutler and Mark McClellan of Stanford found after delving into the returns from medical technology used to treat a number of illnesses, including heart attacks and cataracts. For instance, the cost spent per person for treating cardiovascular disease was around $30,000 and the benefit was around $120,000 (the approximate value of an additional year of life). That's a return of $4 for every medical dollar spent -- a phenomenal figure by any measure.

EASILY AFFORDABLE. Similarly, economist Frank Lichtenberg of Columbia University studied the returns on medical technology and medical-care spending between 1960 and 1997. He calculated it cost $11,000 in medical spending and $1,345 in pharmaceutical research and development to gain one year of additional life. Meanwhile, the economic return for a year of life added up to $150,000. Clearly, we can well afford universal health care.

Look, none of this is to say that getting old is fun -- believe me -- or that an aging society doesn't confront all of us with public-policy challenges. But there are many positive fundamental forces at work that deserve emphasis. Business is more productive than at any time since the 1960s. The elderly are more vital than before. Yes, we can afford to grow old.