2004 March 18 Thursday
Social Security And Medicare Headed For Bankruptcy Sooner

Medicare is the bigger problem.

A new government report to be released to Congress next week will show that the long-term outlook for Medicare is extremely bleak and that the program is heading for insolvency earlier than previously forecast.

...

Last year, the trustees estimated the Medicare trust fund would go bankrupt in 2026. This year, the insolvency date will be moved up by a couple of years. The estimate has little to do with the new drug benefit, which is not financed out of the trust fund.

The official estimate of unfunded liabilities is going to grow by a few tens of trillions of dollars.

The annual reports on Social Security and Medicare will include new estimates showing that the total gap between the cost of promised benefits and the revenues to pay for them is close to $50 trillion, the experts said. By contrast, the Bush administration estimated last year that the long-term gap was $18 trillion over the next 75 years.

These revision in the estimates of unfunded liabilities by Social Security and Medicare trustees amounts to a catching up with another bleak estimate made by Jagadeesh Gokhale of the Cleveland Federal Reserve Bank and Kent Smetters who began working on the estimate with Gokhale when Smetters was still with the US Treasury under former Treasury Secretary Paul O'Neill. You can see more from Alex Tabarrok on the Gokhale-Smetters estimate here and here.

The only way to avoid this looming financial disaster is to develop rejuvenation therapies that will reverse aging and allow people to live and work decades longer.

Another way to reduce the size of the coming financial train wreck is to change our immigration policy in ways aimed to reduce the number of low income and therefore low taxes paid immigrants.

In 1999, 74 percent of households headed by natives had to pay at least some federal income tax, compared to only 59 percent of Mexican immigrant households. Even if one confines the analysis to legal Mexican immigrants, the gap between their tax contributions and those of natives remains large. Using the same method as before to distinguish legal and illegal Mexican immigrant households, the estimated federal income liability of households headed by legal Mexican immigrants in 1999 was $2,538. Thus, the very low tax contribution of Mexican immigrants is not simply or even mostly a function of legal status, but rather reflects their much lower incomes and larger average family size.

Immigration policy could be changed to slow the financially unfavorable demographic changes caused the influx of low skilled workers who are another part of the growing Recipient Class of people who get more in benefits from the government than they pay in taxes. It is possible to gradually deport all the low-skilled illegal immigrants and immigration eligibility could be changed to require all immigrants to have high levels of skills and intellectual ability. We could also Accelerate Education To Increase Tax Revenue, Reduce Costs.

If we stopped allowing in immigrants who have less than a college education and if we accelerated education of our own youth we'd be in a much better financial position than we will be otherwise. However, those two changes by themselves are still not sufficient to solve the problem caused by the increasing average age of the population. It would make sense to start raising retirement ages right now. But do not expect this to happen. Most people and most politicians do not want to think about this problem. It is unlikely any President or Congress will try to seriously tackle the problem before they have to. Once it is no longer possible to delay then at that point dealing with the problem will be more expensive and painful for those still alive.

Demographic trends matter. America is far weaker than it looks because demographic trends are so unfavorable. Generations of neglect of slowly developing demographic problems has allowed those problems to develop to a point where they look set to gradually rob the American economy of a considerable amount of its future potential for growth in per capita income.

Share |      By Randall Parker at 2004 March 18 11:56 PM  Economics Demographic


Comments
R said at March 20, 2004 6:29 PM:

Randall, besides China, what do you think are going to be the dominant countries in the next 20-50yrs? I am wondering if you think America will be stronger than, for example, Europe and if this will help mitigate our own economic/ demographic downturn?

I think questions like this need to be framed with regard to comparisons for other countries on the global scene. Europe WISHES it had our immigrant problem.

Randall Parker said at March 20, 2004 6:51 PM:

R, Certainly Europe's demographic problem is even bigger than America's. Europe's immigrants are Muslims for the most part. Europe's whites are reproducing at a lower rate than American whites. The US, while it is getting a large influx of Hispanics who perform on average poorly in school, is at least getting categories of highly skilled smart immigrants for technical and engineering jobs. I doubt that Europe is getting anywhere near as many for that purpose since Europe is losing some of its best brains to the US.

On net our immigration pattern is a demographic problem, not a demographic solution.

As for another major power rising: India is rising but its annual growth rate has been half of China's for many years and that looks set to continue. I do not see another power of importance that is on the rise. Russia is a mess and its population is going to shrink. Japan is headed toward having a declining population.

China is going to become the largest economy in the world and the US will slip to second place. I do not see another major challenger on the horizon. Most of the successful East Asian countries have populations too small to be major world players. Latin America is going to continue to lag. Africa is going to continue to be at the bottom. The Middle East will not see major per capita GDP growth even as its population explodes. Decline in oil production will eventually make the Middle East less important except as a source of terrorists.

R said at March 21, 2004 8:48 PM:

Randall Parker:
"The US, while it is getting a large influx of Hispanics who perform on average poorly in school, is at least getting categories of highly skilled smart immigrants for technical and engineering jobs. I doubt that Europe is getting anywhere near as many for that purpose since Europe is losing some of its best brains to the US."

More important than even IQ in this case, our Latin immigrants are vastly more assimmilable than Europe's Muslims immigrants. Neither group will likely be as highly productive as, for example, the average Chinese or Indian immigrant, but America has it better than the EU.

"China is going to become the largest economy in the world and the US will slip to second place. I do not see another major challenger on the horizon. Most of the successful East Asian countries have populations too small to be major world players. Latin America is going to continue to lag. Africa is going to continue to be at the bottom. The Middle East will not see major per capita GDP growth even as its population explodes. Decline in oil production will eventually make the Middle East less important except as a source of terrorists."

I used to think that the Pac Rim (except China) was in especially bad shape since they have such a low birth rate. It might be that a low birth rate with little to no immigration is better than a low birth rate with massive unskilled immigration. This is just a thought (maybe even an idea for a post) to consider anyway.

However, I agree with the major points you've raised about the new world order. But, my question to you is how bad will the US fare in your scenario if they are #2 or close to #2. We'll still be getting a highly productive core group of immigrants. There will still be a decent amount of native born whites as well. It is conceivable to me that we'll still be able to fill a great number of elite positions with more than qualified candidates. Granted, China will likely have more high IQ people in absolute numbers. I think that factors which will retard our economic progress other than immigration include excess litigation, affirmative action, and an expensive safety net for the elderly and the poor. I could probably come up with more negative factors but this is a start. Yet, I am hoping our standard of living will not decline that much. Quite frankly, it MIGHT even be conceivable that if the EU continues to slide and (assuming you're right) if the Pac Rim slides concomitantly, America will be in a pretty good economic position (relatively speaking).

I am thinking about some of our positives. We have a great infrastucture for R&D (especially for basic science). In fact, our elite colleges and post- collegiate educational systems are world class. We have a relatively good transportation system. We have a lot of land. We have a great military. World opinion might be more likely to help prop us up (i.e. keep the dollar strong) especially when the world understands that China is the alternative superpower.

This subject probably deserves a post unto itself. The relative nature of this question is rarely covered.

Randall Parker said at March 22, 2004 10:12 PM:

R,

Keep in mind that the rate of technological progress is going to accelerate. So even if we have a larger proportion of the population too old to work and have a growing fraction of the population that is not too bright we still might be able to maintain or increase per capita GDP due to technological progress. In absolute terms I am not as pessimistic about the future as I am in relative terms.

There is, though, another reason to be pessimistic in absolute terms: We are living beyond our means even before the baby boomers start retiring. The trade deficit is causing foreigners to build up debt and equity holdings in the US and we are a net debtor to the world. This is going to eventually cause a further drop in the value of the dollar and our living standards will have to drop or not grow as rapidly as a consequence.

Doug Plata said at July 10, 2005 10:58 PM:

Can America prevent moving into a 2nd place GDP by increasing our immigration to rates equivalent to China's economic growth rates? Also, is China's high economic growth rate a result from opening a large labor force to foreign markets through free trade? If so, will their economic growth rate decline as their per capita income comes closer to that of the developed economies?

Doug
mail@dougplata.com

Dude said at March 9, 2006 10:11 PM:

Doug:

No that's not likely. While we can possibly increase our influx of immigrants, we would need to net approx 500-700M to equal the level of population that China has, thus matching their "resources". Once Chinese productivity per employee is on par with the US, if all continues as it is, China will have approximately 3x the GDP of us, and yes their current growth is induced from industrialization of their country, and is currently unsustainable, unless some major force changes, like say free energy or levitation is perfected.

I think, honestly that technology, if anything will save us, and it's looking more likely that it may. I personally think that the construction/low-to-moderate skill labor (I clean windows, but I know that's soon gone as well) needs to give way to robotics, thus increasing the accuracy and speed of the work and displacing the workers into a higher-skilled employment level. Then, not only would the employees be individually more productive, but all their jobs would be able to be replaced to a fractional number of "repair" workers, who could in turn be replaced by "repair-bots", and on and on. Then GDP will continue to increase.

My concern is the taxes. If there's 2:1 workers to retirees, then taxes on any system would be ridiculously high; in the order of 30-50% just to support the retirees with their marginal lifestyle and medical factored. Maybe more than that. Nobody will stand for that. My personal opinion has been that there will be large, inexpensive prison-style "retirement camps" to go to, so the government can trim down expenses. That in itself is dehumanizing which has many more externalities.

One question. In your opinion, would it be possible for the american people to start saving 20-30%, which is *ahem* not happening today, to become the world's financiers, and own the majority of their stock as well as collecting massive profits from the rest of the world's productivity. Then maybe the 2:1 ratio wouldn't quite hurt so much.

Doug said at October 2, 2006 5:18 PM:

Dude,

Not sure how you're doing your calculations. Increasing our population to China's 1.3B by 2050 would mean a 3.4% US population growth rate. Currently we have 1.2M total immigrants (legal + illegal) enter the US each year. If we were to have 3.4% population growth each year this would men 12.0 million per year. IF all of these were legal immigrants that would be a ten-fold increase in total immigration - quite a jump. But since they would all be legal and hence regulated, some of the down sides of immigration would be mitigated. Now, would a larger population of younger immigrants in the US mean that our economy would expand? I think so. These would be productive younger people, coming already trained into our economy if we so chose to set our immigration policies that way.

Also, China's pop / US's pop (currently) is 1.3B / 300M = 4.3 x our GDP when they reach our level of productivity. Yes, China's growth is due to industrialization but their growth rate is unsustainable due to the decreasing difference between their per capita income and ours. It is not limited by energy. New forms of hydrocarbons are entering the equation (e.g. oil sands of Canada = 315B barrels compared to oil of Saudia Arabia = 264B barrels, coal = much greater amount). Likewise, is there a reasonable limit to the amount of nuclear power that countries could develop?

Technology makes us more efficient but has done little to reduce the costs of Social Security or Medicare. I'm not looking to technology to save us from the financial obligations that we'll be experiencing in the next 20 yrs (ala the Baby Boomers).

There are many solutions before we get to the "prison camp" stage. Ever extending the retirement age would go a long way. Limiting covered Medicare services, and immigration all would be maximized by our society before we turned to prison camps.

Yes, it is possible to have forced 20-30% savings. If we were to actually put Social Security in the proverbial "lock box" this would go a long way towards that. But I join you in skepticism that any of the above necessary measures will be taken before there is a (potentially sudden) financial crisis.

Doug


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