THE ECONOMICS OF AGING:THE ECONOMICS OF AGING:

For Individuals

&

For Society

Impact of Financial Resources on Impact of Financial Resources on IndividualsIndividuals

• Can my values and preferences be realized?

• Can I maintain control over my life?– Which leisure activities to pursue– Travel?– How to maintain my diet?– How much preventive health care should I

seek?– Etc, etc, etc

Retirees’ Income Sources: The Retirees’ Income Sources: The Three-legged StoolThree-legged Stool

• Social Security

• Private pensions

• Personal Savings/Assets

SOCIAL SECURITYSOCIAL SECURITY

• Initiated in 1935--FDR

• Social Insurance Program:”in which the population pools resources and collectively shares the risks of growing economically dependent through old age or disability”. (Morgan & Kunkel, p. 313)

Who benefits most?Who benefits most?

• Those who had higher earnings and larger contributions while working

• Those who live the longest post-retirement

Social Security: The ProgramSocial Security: The Program

• Benefits to ~45 million people, 62% retirees

• Ave. retired worker benefit: $782/mo

• 22% of the total Fed budget

• 90% of all workers are in jobs that are covered

• “…highly effective in reducing poverty among the elderly”. (p. 315)

Social Security: The DebatesSocial Security: The Debates

• The underlying social insurance premise--also adequacy and equity of benefits

• Using age as a basis for entitlement

• The funding mechanism(2)

• Constant “tinkering”

What about privatization?What about privatization?

• Advocates prefer the risk of the market to the low returns of govt. bonds

• Critics: No protection for individ. Who invest their money poorly or are conned.

Boomers: The Pig in the Python--Boomers: The Pig in the Python--What to do?What to do?

• Increase employees’ payroll deductions & employers’ contributions

• Reduce benefits to retirees

• Obtain $ from other sources

• Raise the retirement age or encourage OA’s to keep working

• Some combination of 1-4

PRIVATE PENSIONSPRIVATE PENSIONS

• Sponsored & partially paid for by employers

• ~ $5 trillion invested in US

• Employee must be vested

• Rare in service occupations

• Available to ~ 50% of the population

• Concept emerged in late 1800’s

• Employee Retirement Income Security Act of 1974--Controls:– how funds must be collected & credited to the

employee– how employees become vested– how pension funds are managed

Defined benefit pension systemDefined benefit pension system

• Employer controlled

• Benefits guaranteed--formula based on:– no. of yrs worked and/or– salary

– E.G.--- Ohio’s STRS/PERS

Defined Contribution Pension Defined Contribution Pension (IRA / 401K plan)(IRA / 401K plan)

• Employer & employee both contribute

• Fund held by an independent financial entity

• $ belong to the employee

• $ subject to stock & bond markets to determine benefits

• Benefits amounts NOT guaranteed

SAVINGS & ASSETSSAVINGS & ASSETS

• Assets: Resources that can be converted into money– home equity– cash savings– stocks & bonds

• In-kind income: – Non-cash benefits that contribute to

economic well-being by reducing necessary expenditures. E.g.:

• Medicare

• Subsidized housing

• Food stamps

The Economics of Aging for The Economics of Aging for SocietySociety

• Concepts basic to understanding Population Aging:

• FERTILITY– “When fertility falls below the replacement level

of 2.1 births per woman, as it has in Russia, Spain, Italy, Germany, China, Taiwan, Korea, and many other countries…the proportion of the elderly rises as population growth rates fall.”(Population Reference Bureau, p. 3)

• MORTALITY:– “If long-term rates of improvement continue,

U.S. life expectance will rise from its current 77 years to 86 by 2075 , and to around 88 by the end of the century.” (Pop. Ref. Bur. P. 4)

• DEPENDENCY RATIOS:– “…reflect the general expectation that children

(< 18 y.o.) and older persons (> 64 y.o.) are economically inactive while those in between are economically active, creating the goods and services that we all consume.” (Pop. Ref. Bur., p.4)

• Old Age Dependency Ratio-- # of persons 65 or older per 100 people ages 19 to 64)– Currently 21 per 100– By 2035: 36 per 100– “…instead of there being nearly five persons of

working age for each older person, there will be fewer than three.” (Pop. Ref. Bur., p.4)

Which Programs Will Aging Which Programs Will Aging Affect?Affect?

• Fig. 2 “…illustrates how the aging of the population is putting pressure on public budgets.”…(federal, state, and local combined). (Pop. Ref. Bur.)

• Fed’s programs most affected:

• SOCIAL SECURITY

• MEDICARE

• MEDICAID

Impact on: Social SecurityImpact on: Social Security

• Between 1962 and 1999, Social Security payments went from 2.5% of the gross domestic product (GDP) to 4.5% of the GDP.

• SS benefits provide more than 50% of family income for 2 out of 3 older Americans

• “The system is not in fiscal balance, and it the low is not changed, the trust fund will be exhausted at some point before mid-century.” (Pop. Ref. Bur, p. 6)

Impact on: MedicareImpact on: Medicare

• “Medicare, created by amendments to the Social Security Act of 1965, provides insurance covering hospital bills (Part A) and physician fees (Part B) for most Americans age 65 and older.” (Pop. Ref. Bur., p. 7)

• Medicare expenditures:

– 0.7% of GDP in 1970– 2.4% of GDP in 1999– # of enrollees doubled– expenditures /enrollee quadrupled

• Projections for the Future:– very difficult to make– Medical costs may rise (medical technology)

OR– Med costs my slow (population’s better health

& cost control via managed care)

Impact on: MedicaidImpact on: Medicaid

• The government health program for poor people

• The largest source of payment for long-term care the the disabled and older people

• 70% of nursing home residents are covered