Sixth Munich Economic Summit
EUROPE AND THE DEMOGRAPHIC CHALLENGE
Panel Discussion
Top-Heavy Load: Trouble Ahead for Social Security Systems
Craig L. Fuller
Executive Vice President
and
Member, International Advisory Council
APCO Worldwide
Washington, D.C.
22 June 2007
Mr. Chairman, ladies and gentlemen…it is a great pleasure to serve as a panelist this morning for our discussion focused on the trouble ahead for our nations’ Social Security and health care systems.
The instructions to panelists suggested we be brief and provide stimulation for discussion. I will do my best….indeed, currently in the United States our presidential candidates seem to provide plenty of material in the already lively debates about healthcare even though we are still 16 months away from our November 2008 elections.
It seems fitting that we would gather in this beautiful city of Munich to discuss the topic of aging because Germany is the location of a very important determination made more than 120 years ago. It was then that Chancellor Otto von Bismarck in the 1880s was designing Germany’s first pension plan. As part of the plan, the Chancellor declared that age 65 would be the marker for old age.
Reports have it that the average life expectancy was only about 45…so, that was a pretty good decision from an actuarial point of view.
Many years later when we in the United States formed our Social Security system, we stuck with 65. Even then, it was a pretty good call as the average life expectancy was 63. And, even more importantly, there were 40 workers for every individual eligible for a Social Security benefit.
We approached the health care needs of our senior population in the 1960s and passed the Medicare Act in 1965. At that time we had about 204 million people in the US of whom less than 10%, about 19 million, were 65 and older. When the Act was passed, prescription drugs were not even included in covered health care expenses because they were neither that costly nor that effective. This, of course, changed. While it took more than 40 years, in 2003 a Medicare Modernization Act passed setting the stage of our own unique version of health care coverage for prescription drugs as part of Medicare.
These programs, so vital to America’s seniors, have grown considerably. More importantly, the population has shifted in fundamental ways. America, like Europe in the post-war period, saw the creation of a baby boom generation. It has changed everything in its path and in 2011 – less than 4 years from now – the baby boom generation will start hitting 65. And, they (I should say we) are a whole lot different group then Chancellor Otto von Bismarck could ever have imagined.
To fully appreciate what we are facing, we need to go back and consider what life was like in the 1930s in the US. The birth rate had settled in at about 2.1 children per family.
Then came 1946. In the post-war period, the birth rate rose to 3.8 children per family. Indeed, in the US some 76 million children were born between 1946 and 1964 – representing nearly 1/3 of the US population.
Similar baby boom generations were created in Europe, Asia, Australia and New Zealand.
There should be no mystery that what is coming will be big!
A friend of mine, Ken Dychtwald, who has studied this phenomenon, likes to call this the “Pig in the Python.”
As Ken says:
Boomers didn’t just eat food…they transformed the snack food and restaurant industries.
Boomers didn’t just wear cloths….they transformed the fashion industry.
Boomers didn’t just buy cars….they transformed the automobile industry.
Boomers didn’t just go to work….they transformed the workplace.
Boomers didn’t just use computers…they transformed technology.
At each and every stage as the “pig” moves through the “python” the bulge is evident and it transforms.
This will be the case with retirement and health care programs….in fact, we need to rethink retirement…with all do respect to Chancellor von Bismarck.
The model where people enjoyed childhood, went to school, graduated from college, got a job, retired at 65, went on a cruise and then died is no longer applicable (Another Dychtwaldism.)
People get educated. They work. They relax. They get reeducated and they go back to work. Along the way, they become much more concerned about a healthy lifestyle. They want to look good and feel good….they want to enjoy life. And, that enjoyment is going to last longer….a lot longer.
Of course, our systems are not really set up to accommodate some of these shifts.
Remember the 40 to 1 ratio of workers to Social Security beneficiaries when the program was launched? Well, today that ratio in the US is 3.3 to 1. And, in 2040 in the US there will be two workers for every beneficiary. That means a 32 year old worker today will turn 65 and have benefits that must be generated by just two people in the workplace.
And, we are talking about a great many people. Today in the US, 50 million individuals are receiving Social Security benefits and we have 163 million workers contributing into the system.
But, Social Security in the US is a system under duress.
Just a couple of months ago the Social Security Trustees reported that the annual costs of Social Security benefits will exceed tax income into the system starting in 2017. After that point, the Trust Fund assets held by the Treasury will be utilized; however, they are projected to be exhausted in 2041.
The Trustees included this statement in their report: “The projected trust fund deficits should be addressed in a timely way to allow for a gradual phasing in of the necessary changes and to provide advance notice to workers.”
Turning to America’s health care program for people over 65….our second largest social insurance program after Social Security, the picture is equally as troubling.
Today, 43 million individual receive benefits from Medicare.
The recent report by the Medicare Trustees indicates that in 2006 the Medicare program paid benefits of $402 billion and had income of $437 billion.
Using their “intermediate assumptions” the Trustees indicate that the Hospital Insurance trust fund is expected to be exhausted in 2019 and the financial outlook for the Medicare program continues to raise serious concerns – indeed, by law the Trustees were required to issue a “Medicare funding warning” to the Congress.
Finally, as if you needed more, there is one last looming problem.
While life expectancy has lengthened through better understanding of health care issues, better medicine, better treatment and healthier lifestyles, we are producing a population that will increasingly struggle with issues related to dementia in their final years. Today, in the US, 47% of people 85 years and older suffer some form of dementia. It is estimated that 14 million will suffer from dementia by the middle of the century.
This represents a level of tragedy and costs for families that we really have not come to grips with in the US.
Are there solutions?
I do not believe there is what we like to call a “silver bullet.” There is not one solution that will walk us back from the fiscal and public policy challenges we face.
There are some interesting trends that must be considered and directions that should be nurtured.
First, it is important to remember that this baby boom generation is not approaching 65 as a poor or downtrodden class.
Estimates from just a few years ago suggested that in the US people age 50 and over were earning over $2 trillion a year and owned 70% of the financial assets in America.
Furthermore, this over 50 population accounted for 50% of all discretionary spending. They own 77% of all financial assets, representing 2/3rds of all stockholders.
And, they spend to take care of themselves: over $610 billion on healthcare of all kinds….51% of all over-the-counter drugs and 74% of all prescription drugs.
And, they are going to participate in the search for solutions…because, they vote!
In a recent national election, nearly 70% of Americans over 65 voted while only 33% of 18 – 24 year olds voted.
We do have a debate raging among a large field of presidential candidates in America. Yet, on healthcare a kind of general consensus seems to be emerging. Candidates on both sides of the aisle are calling for universal healthcare coverage….yes, coverage. They are not suggesting that the US government should run a national healthcare program. They are suggesting that everyone should have health insurance.
Some of our states have introduced this concept. And, I am sure others will experiment with the idea as it is debated through 2008. However; I suspect that when the next President of the United States stands on the steps of the US Capitol in January 2009 for his or her inauguration, either he or she will call for health care coverage for all Americans.
It will take us time to figure out. But, we are already seeing some very significant benefits from the Medicare prescription drug coverage available to seniors. If we can address the issues associated with chronic illness – where we spend most of our money – through the proper use of medication, we can improve patient health and hold down some of the rising costs.
It turns out that prevention and managing a person’s medication may be the keys to the future.
Still, we have large and significant funding issues ahead for nations across the globe. We are going to have to step away from the notion that some kind of metaphysical phenomenon occurs at age 65. We are going to have to realize – at least in the US – that some Americans both desire and can afford health care coverage beyond that which the government can afford to provide.
We are going to have to heed the words of the Social Security Trustees and start addressing the challenges of the future now.
That ladies and gentlemen is why forums like this one are so important.
It has been an honor to be part of this discussion.
Thank you.
