Neither political party appears likely to support entitlement reform if it means reducing benefits for the current generation of retirees or those approaching retirement age. Although economists are correct to point out that the growth in entitlement spending presents a huge challenge, seniors care about the financial burdens facing their children and grandchildren and can take private actions to mitigate the damage caused by inactivity in Washington, DC. Seniors can delay retirement, work longer, save more, and leave more in bequests to their children and grandchildren who are likely to face higher taxes and reduced benefits.
On Bloomberg View Professor Laurence Kotlikoff, a one-time candidate for President of the United States, warned that “expanding Social Security, Medicare and Medicaid benefits, shifting the structure of the tax system to lower the burden on retirees relative to workers, and cutting taxes have all saddled the U.S. with unsupportable obligations.” He also argued that a solution to this dilemma should include a reduction in the Social Security and Medicare benefits of today’s elderly. Without such sacrifices Kotlikoff calculates that we are likely to leave “future generations to cover what now amounts to a $222 trillion fiscal gap between future expenditure and taxes.”
Lawrence Summers, Harvard professor and former director of President Obama’s National Economic Council, explained in the Washington Post that 32% of the federal budget is devoted to supporting those over 65. He also warned that the ratio of individuals age 65 and above to those of working age “will rise from 1 for every 4.6 workers to 1 for every 2.7 over the next generation.”
Adam Ozimek at Modeled Behavior has suggested that one way to mitigate the impact of the aging baby boom population is to increase (skilled) immigration among the working age population. This can and likely will be part of the solution. However, Ozimek calculates that immigration would have to more than double for the working age population to increase as much as the elderly population (in sheer numbers), and immigration would have to increase by more than 600% for the ratio of workers to retirees to remain constant. Again, this seems unlikely to occur.
Some older current retirees and early generations of retirees, who worked between the 1950s and 1980s, were often entitled to receive more (in present value) than they contributed to the Social Security and Medicare system. These parents of baby boomers have already received most if not all of their entitlement benefits. In a pay-as-you-go system payroll taxes on their children and grandchildren financed part of their Social Security and Medicare benefits. The magnitude of Social Security’s potential intergenerational transfer varies from decade to decade. During the 1950s, a worker with the median (male) earnings paid an average payroll tax rate of 3.8% (half matched by their employer). Because maximum taxable income in the 1950s was slightly above median earnings, a worker earning twice the median (near the top 10% of earners) paid an average tax rate of 2.22%. The following chart shows that average tax rates increased dramatically from 1950 to 1990. Since 1980 there has also been no difference in the average payroll tax rates paid by nearly all workers, regardless of their income.
Although it is doubtful that either political party will support entitlement reform that reduces expected benefits for adults age 60 and above, seniors can make sacrifices for their children and grandchildren without Congressional action. If older Americans internalize the financial burdens of their children and grandchildren (Ricardian equivalence) they will not view the political failure to reduce current benefits as an increase in their family’s wealth. They will work longer and save more to leave as bequests. Larry Summers wrote that it is unlikely that increased labor force participation of seniors will be enough to counteract the demographic changes we face, but the aggregate effects of these private financial sacrifices can be substantial.
Over the past two decades the labor force participation rates of men and women age 60 and above increased by about 30 percent. There are 3 million more adults in their sixties in the labor force than would have occurred if labor force participation rates remained constant. Part of this, no doubt, is due to increases in health and life expectancy of seniors. For the average 65-year-old man two more years of work now represents only 11.4% of his remaining life. For the average 65-year-old woman two more years of work represents less than 10% of her remaining life.
Responsible behavior by seniors can mitigate the failure of the President and Congress to make serious reforms to entitlement programs. Unfortunately these private efforts probably won’t be enough to close the gap in entitlement funding faced by future generations. But if tens of millions of seniors delay retirement and save more over the next two decades it will surely help.