The Demographic Revolution is winning, which means we are all losing

by Ryan Streeter on April 25, 2012. Follow Ryan on Twitter.

Keith Hennessey offers this very important insight from Tuesday’s Social Security and Medicare Trustees reports:

There is an incorrect and misleading conventional wisdom that health care costs are the principal driver of our long-term entitlement spending problem.  That’s true, but only starting about 20 years from now.  For the next two decades demographics, specifically the retirement of the Baby Boomers, is the biggest driver of entitlement spending growth.  The point that everyone misses is that Medicare (and Medicaid) spending growth are driven by a combination of health cost growth and demographics.  When you combine the demographic factor driving part of Medicare spending growth with the demographic cost driver of Social Security, you account for more of the total spending growth than if you look only at the effect of per capita health spending growth.

I sometimes think that when historians look back at the present era, it will be known as the Demographic Revolution. In less than 100 years we have seen the biggest jump in life expectancy the world has ever known, right at a time when western governments made massive long-term commitments to retirement and health security. Add to this both the medical breakthroughs that make these long lives not only bearable but capable of prolonged productivity, and a tremendous accumulation of wealth and capacity for leisure – and you have a very different kind of “good life” than in centuries past, in which many more people as a share of the population are active consumers of both private and public goods for many years after mid-life.

This Demographic Revolution is beginning to exact with full force a kind of fiscal violence on the young that some have been predicting for awhile but which most have basically ignored.  Hennessey is right to point out that this – demographic reality – is a far bigger driver of our entitlement problem than health care costs (the issue you always hear a lot about).

He says conventional wisdom about entitlements is confused for two reasons:

(1) People ignore the demographic drivers in Medicare spending.  Medicare grows because there are more seniors collecting it and because spending per senior is growing unsustainably fast.

(2) Advocates for the Affordable Care Act, including President Obama and his former budget director Peter Orszag, worked hard to convince people that “It’s all about health cost growth.”  This served two of their purposes:  to make an argument for their health care reform proposal and to rationalize not doing anything to fix Social Security.

I would only add to that second point that the Obama administration has also served to make the demographic problem worse by refusing to seriously engage with the Bowles-Simpson Commission. Failure to engage with the Commission’s recommendations and choosing instead to demonize Paul Ryan’s attempts to deal with the issue has served to cover the public’s eyes with blanket of political cynicism, making it harder to persuade people that there is a real problem we need to deal with.

The result is that the Demographic Revolution has only grown stronger and now threatens more than ever to crack the foundations of American greatness.

  • Anonymous

    I very much like your point about the demographic revolution overlapping the commitment to health care and retirement. There’s a harmonic in the combination of policies that is now magnifying the fiscal effects.

    It is of course highlighted by the active workers per retiree when FDR and Congress enacted Social Security to today’s ratios. 1935 42 workers to 1 eligible retiree. 1960 5.1 to 1; Today approximately 3:1 and rapidly headed to 2:1 with the Baby Boom retiring. That is an extraordinary burden on young workers whose economic opportunities are already constrained by debt-strangled slow growth and personal debt from student loans.