Should We Increase National Savings Rate? Yes

By Jaymie Gross

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The age demographic of America is changing. It appears that on average Americans are older. Beginning in 2010, the age dependency ratio will increase, which means the amount of dependent elderly will exceed the number of dependent youth. Government programs for the elderly already comprise a large portion of the budget. However, the enlarging elderly population poses an increased burden to government budgets at local, state and federal levels, since much of elderly consumption is financed through public spending. When the baby-boomer population retires, there will be a larger population receiving benefits than there are active workers providing for such benefits. The younger generation will no doubt bear the burden of tax hikes, necessary to reach the current level of benefits provided by the elderly programs today. In his essay, Fiscal Challenge of an Aging Population, Gary Burtless examines the budgetary effects of the aging population and explores possible policy solutions involving national savings, which attempt to ease the financial burden on the future working generation.

Elderly Americans draw much of their retirement support from government programs. In addition to Social Security, Medicare and Medicaid, there is a spectrum of other programs at local and federal levels to assist the older generation with retirement. For poor families with an elderly member, Social Security accounts for 60 percent of a families cash income, and more than 25 percent of the income in non-poor families. Medical insurance makes up another large portion of the aid given to the elderly, accounting for 50 percent of the cost of paying Social Security benefits (Burtless 227). Clearly, public transfer acts for the elderly makes up a large percentage of the government’s budget.

These programs are an expensive burden on the American government and the costs are rising. In 1991, the U.S. Congress estimated that spending on elderly programs made up 28 percent of all federal spending (Burtless 227). Future costs of public spending on elderly programs are prepared by OASDI, using the growth rate of the elderly population and the rate of change in spending per retire. These projections utilize the demographic assumptions to produce optimistic, intermediate and pessimistic forecasts. For the purposes of Burtless’ article, he used the intermediate forecasts as evidence. "Between 1990 and 2035, the percentage of national output that will be absorbed in public spending on the elderly will double, rising from 8.2 percent to 16.5 percent of GNP" (Burtless 230). Elderly assistance programs are one of the largest components of the budget and the costs are escalating.

Programs for the elderly come with large price tags, which may seem to present political and economic sustainability questions. Are American’s prepared to meet the financial burdens these programs require to maintain themselves? Interestingly, Americans are, according to public opinion polls. There is overwhelming support for Social Security and Medicare programs. Historically, they are among the most popular federal programs among voters, despite the reoccurring tax hikes necessary to pay for them. In fact, support for such programs is found across the age spectrum. "The percentage that supports the current level of taxes is exactly as high among 18 to 34 year olds as it is among 50 to 64 year olds" (Burtless 233).

While there is an evident willingness to pay for Social Security programs, the public is no so forthcoming with raising taxes to pay for other programs. With public spending up and government revenue nearly unchanged since 1970, the government has incurred a large public debt. Spending on social insurance is rising and increases are expected for the programs to continue. The money for such programs comes from a visible payroll tax on working Americans wages. As for raising taxes to support other government outlays, voters are very reluctant. It seems people are unwilling to pay taxes above 30 percent of national income. However, Americans are still ardently supportive of elderly programs, and the elderly are increasingly becoming one of the largest voting bodies.

Burtless proclaims that there is willingness to pay for the rising costs of elderly programs. IN addition to the popularity of such programs, he offers a comparative analysis of other advanced industrialized countries. Comparatively, America spends far less than other industrialized countries with similar standards of living on pension programs. Therefore, the U.S. can afford to extend public support for such programs. America is still far from reaching other industrialized countries level of spending on the elderly, which leaves us room for increased spending on Social Security and Medicare.

Instead of increasing public spending to address the rising cost of elderly assistance programs, reducing the benefits is an alternative solution. Burtless discusses two methods for curtailing the benefits of such programs. First, it is possible to implement tighter restriction on program eligibility, thereby offering benefits to less elderly Americans. An alternative curtailment is to reduce the average benefits themselves. To look at the effects of both solutions the author uses analysis of two components that affect the increase in future spending on the programs: 1) the pure effect of population aging and 2) the generosity of each program.

In looking at Medicare, Burtless notes benefit generosity accounts for the increase in spending from 1990 to 2015. However, after 2015, the rising cost of Medicare is a function of pure population aging. It is important to note that in this case, "benefit generosity" has a specific meaning. It indicates the increase in medical care cost not a larger bundle of benefits. Therefore, to reduce cost, cost containment is important, but will not be sufficient on its own. Population aging is to blame for much of the increases in Medicare costs. The program spending will nearly double between 1990 and 2040 (even with maintaining the benefit levels of 1990). Implementing a means test, to reduce the number of Medicare recipients will reduce the burden on government budgets, but public spending on medical insurance for the elderly will still be costly in the private sector. "This burden of population aging cannot be avoided simply by removing older people from public insurance rolls" (Burtless 239).

Burtless uses the same divided analysis for Social Security pensions, as he separates the effects of population aging and the changing in benefit generosity on the rising costs. The evidence shows that "average benefits are…expected to shrink relative to output per worker, partially offsetting the influence of population aging" (Burtless 239). He gives two reasons for this phenomenon. First, Social Security amendments adopted by past congresses and presidents have already begun to cut back benefits. Secondly, there is a continued "erosion in the taxable wage base of social security" (Burtless 240). So there are political and economic factors already in motion to reduce the future burden of social security on the government budget.

Burtless concludes his analysis of the situation by explaining how the aging population is to blame for increased costs in elderly retirement programs. While benefit generosity affects the short-term increase in costs, it is clear that the rise in long term public spending is a function of an older American population. It is assumed that by 2040, government outlays for Social Security and Medicare will rise 6.3 percentage points, given a constant benefit generosity.

Future costs are rising to care for the elderly, however, Burtless argues these cost hikes are economically manageable. He proceeds to offer fiscal policy advice for alleviating the future burden of increased costs. His analysis suggests that while cost containment of medical costs could help in the short run, the long run require a reduction of benefits. Raising the GNP through fiscal policy is essential to relieve the burden of increased costs of elderly programs. Currently, both Social Security and Medicare are producing a surplus. This means that the government is taking in more revenue from taxes than it is paying out in benefits. The left over revenue is placed in OASI, DI and HI trust funds, which are subsequently invested in U.S. treasury securities.

The desired effect of this is to reduce the government’s dependence on the public to borrow money, by borrowing instead from the surpluses. The public is left with a greater share of their income, which they can invest in the private sector. The net effect is an increased domestic capital stock, which over time will eventually raise GNP. With a larger national income, the increase in Social Security and Medicare payments won’t be so painful for future generation because there will be more resources to share. The higher incomes of workers will create higher productivity and wages.

The surpluses themselves are large enough to actually increase capital stock for the next few decades. In that time government will spend far less on elderly programs than it takes in. Adding to this additional revenue is the compounding interest the surpluses are accumulating in the trusts. The OASDI trust as a percentage of GNP will peak around 2020, when in will start to decline. At this point, "the operations of the social security rust fund will reduce rather than raise national savings unless benefits are curtailed or tax rates increased" (Burtless 245).

Using the surpluses wisely over the next few decades is paramount if we are to reduce the burden on future generations to provide for the elderly. Therefore, fiscal policy changes are necessary to ensure the social security surpluses produce the desired increase in national savings. One proposed change to current fiscal policy, is a reduction in national deficits in non-social security/ Medicare parts of the budget. In the past decade, the government has borrowed from the social security surpluses to pay for other programs, instead of contributing to national savings. Budgets must be constructed so they are able to meet their operational costs without dipping into social security surpluses. Leaving the surpluses in their trusts will thereby produce the desired rise in national savings.

Burtless offers an additional fiscal policy solution using the "actuarial balance". This policy advocates maintaining social security benefits in actuarial balance, a balance between the expected pay out of benefits and the income rates over a seventy-five year span (Burtless 246). In watching the actuarial balance, when available income falls below 95 percent of necessary outlays, payroll tax should be raised or benefits reduced immediately. Currently the programs are no were close to balanced. Accordingly, Burtless suggests raising taxes or reducing benefits soon. Getting back to an actuarial balance will revive the surplus and contribute to a larger peak of OASDI trust fund reserves. While this plan will be difficult in the short run, "[in ten years] per capita consumption [will be] higher tan it would be if current fiscal policy were maintained" (Burtless 247).

These proposed fiscal policy prescriptions would maintain social security surpluses so that national savings increase. Then the national savings contributes to a greater capital stock, allotting for enough future consumption to offset the burden of the increased costs in social security due to population aging. "A high saving fiscal policy will produce enough extra income so that the net incomes of future workers will not be reduced by the presence of a large retired populations" (Burtless 247). These policies will increase national savings now, by using the social security surplus to reduce the financial burden of providing for the baby boomer retirees on the future working population.

Implementing these policies will be politically difficult because they involve short-term sacrifices on current consumption. We should however ask the current working generation to take on some of the burden necessary to fund their own retirements. If we do not address the issues surrounding social security and the aging population the future workers of America will face a grave burden.