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As a result of higher life expectancy and lower birth rates, the population of the United States is getting older. By 2040, for the first time in U.S. history, those above the age of 65 will outnumber those below the age of 18. That trend — which has been underway for quite some time — has profound implications across our society, key programs within the federal budget, and the fiscal outlook as a whole.
It makes sense that as the elderly population grows, so too does participation in federal assistance programs for older Americans, such as Social Security and Medicare. Half a century ago, Social Security and Medicare spending, combined, accounted for 20 percent of the federal budget. Now, those critical programs account for nearly one-third of federal spending. That trend will only continue, which will make sustaining those programs more difficult. Looking ahead, there are important factors for policymakers to consider as the nation’s demographics continue to change.
The aging of the population is primarily due to longer life expectancy. Advances in healthcare, better hygiene, and access to safe drinking water and food have extended the lives of people well beyond what was standard just a few generations prior. Specifically, as healthcare improves, so does the length of life. In 1940, men at the age of 65 were expected to live, on average, another 13 years, and women another 15 years. By 2050, both groups are expected to live, on average, at least another 20 years after turning 65.
As life expectancy increases, the population of those 65 or older will continue to expand. In 2020, that age group constituted 17 percent of the population; however, according to the Social Security Administration, by 2040 that proportion will rise to 22 percent.
As the older end of the population grows larger, the share of younger Americans is shrinking. Historically, American women have had their first child at a relatively young age. The median age of motherhood for a woman born in 1935 was below 21. Longer lifespans along with societal and cultural changes, however, are leading to women having children later in life, with median age of motherhood now 26. A delay in having the first child has led to women having fewer children in total. According to the Pew Research Center, there has been a sharp decline in families with four or more children. Societal factors also play a role in the decline of the birth rate. Scholars at the National Bureau of Economic Research found that as women entered the work force in larger numbers, the fertility rate declined. As a result of the abovementioned factors, the U.S. birthrate has dropped from 17 per 1,000 people 50 years ago to 11.1 now.
Social Security is the most common source of retirement support for Americans, and the largest program in the federal budget. Social Security is funded for through a dedicated payroll tax, paid by both employer and employee. In 1970, there were 3.7 workers for every beneficiary of Social Security. The Social Security Administration now projects that ratio will fall to 2.4 workers for every beneficiary by 2030.
As a result of the diminished worker-to-beneficiary ratio and a longer span in which retirees are collecting Social Security benefits, Social Security’s Trustees project that the Old-Age and Survivors Insurance (OASI) trust fund will be depleted in 2035. At that point, 71 million beneficiaries could face cuts in benefits of 23 percent.
To account for longer life spans, in 1983 the federal government legislated a gradual increase in the full retirement age from 65 to 67. With life expectancy expected to continue rising, another increase in the retirement age could be on the table again. That approach could help boost the worker-to-beneficiary ratio as more individuals would remain in the workforce. Payroll tax revenues from those workers could also help the solvency of the Social Security program.
Medicare will similarly be affected by the growing elderly population both in terms of participation and because there is a direct correlation between age and healthcare costs. According to the Centers for Medicare & Medicaid Services (CMS), per capita costs for those 85 years old or older are twice as high as for those 65 to 84 years of age.
As a large portion of the American population lives well beyond retirement age, the total cost of providing healthcare will grow as well. According to CMS, growth in Medicare spending will average 7.2 percent per year until 2030, the year in which every baby boomer would be above the age of 65. Such spending, which now measures 3 percent of gross domestic product (GDP), would eclipse 6 percent of GDP in 2052. Of more near-term concern, the Medicare Trustees project that Medicare’s Hospital Insurance Trust Fund will be depleted by 2028, thereby leading to a 10 percent shortfall in payments for medical services.
The aging of the U.S. population will continue in the decades ahead. As a result, left unaltered, critical health and retirement security programs to assist older Americans are in deep financial trouble. The good news is many solutions exist to reform Social Security and Medicare that will help put them on a more sustainable path. Careful consideration of the demographic drivers, factors, and trends can help policymakers address the sustainability of Social Security and Medicare, putting those programs — and that nation’s budget — on a stronger path for the future.
Related: Finding Solutions: Retirement
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