Government Spending on the Elderly: Social Security and Medicare

Policy Reports | Federal Spending | Health | Social Security

No. 247
Friday, November 30, 2001
by John C. Goodman and Matt Moore

Assumptions Behind The Forecast

Figure V - Number of Workers Per Retiree

Why are Social Security and Medicare in trouble? One reason is that the number of retirees is growing faster than the number of new workers. The result is that the ratio of workers to retirees, which was 42 to 1 in 1940, is 3.3 to 1 today. By 2050, when today's college students reach retirement age, the ratio will be 2 to 1.9 [See Figure V.] The primary causes for this decline are a lower fertility rate and longer life expectancies. Exacerbating this problem is the expected growth of health care costs.
"When today's college students reach retirement age, there will be only two workers for each retiree."

The Fertility Rate. A country's fertility rate is the average number of children a woman of childbearing age will bear over her lifetime. To replace its population, a developed nation must have a fertility rate of about 2.1, assuming net immigration is zero and assuming constant death rates. In other words, to keep the population at its current size each woman must have an average of two children to replace one adult male and one adult female. (The additional 0.1 makes up for children who do not live to adulthood.)
"The fertility rate is the average number of children a woman of childbearing age will bear over her lifetime."

Currently, the U.S. fertility rate is about 2.07, and it has been as low as 1.8 (in 1976).10 Rising percentages of women who never marry, women who are divorced and young women who are in the labor force lead the Social Security trustees to predict a "continued relatively low fertility rate."11

"The U.S. fertility rate is about 2.07"

Other developed nations are experiencing the same decline in fertility rates. While the world as a whole has a fertility rate of 2.82, the rate for developed nations is 1.57 and the rate for Europe is 1.41.12 [See Figure VI.] Germany is at 1.33 and Italy (a Catholic country) is at 1.2.

Figure VI - Average Births Per Woman

As Table I demonstrates, the Social Security trustees' intermediate fertility rate projection is a constant 1.95 into the future. The pessimistic projection is that the rate will fall to 1.7. The implication of either assumption is that the U.S. will eventually see its population shrink. [See Figure VII.] Along the way, the number of old people relative to the number of young will grow continuously, and the tax burden on the young will continue to grow indefinitely. For example:13

  • Between now and 2050, the number of elderly will grow by 117 percent while the number of workers increases by only 24.6 percent.
  • The elderly will grow from 12.4 percent of the population today to 20 percent by 2050.

"Between now and 2050, the number of elderly will grow by 117% while the number of workers will increase by only 25%."

Life Expectancy. In addition to falling birthrates, longer life expectancies are driving down the worker/retiree ratio. In 1940, the year Social Security paid its first benefit check, life expectancy at birth was 61.4 years for men and 65.7 years for women.14 The average male could expect to pay taxes over his entire work life and die 3.6 years before he qualified for benefits. The average female could expect to collect benefits for only a few months. Reaching the retirement age of 65 in 1940 was viewed as unusual. Supporting the few people who did seemed easily affordable.

"Retirees will live longer in retirement and collect more Social Security Benefit checks."

Things have of course changed. Life expectancy at birth today is 73.8 years for a male and 79.5 years for a female.15 The average man will spend about seven years in retirement (collecting Social Security benefit checks) and the average woman will spend about 12 years. And the Social Security trustees expect life expectancy to increase even further in the future. By 2050, when today's college students reach retirement age, life expectancy at birth will be 79 years for a male and 83.3 years for a female.16 Of course, longer life expectancies mean future retirees will live longer in retirement and collect more Social Security benefit checks.

Table I - Key Economic and Demographic Assumptions for the Year 2025

Medical Science. One of the factors contributing to the increase in life expectancies is advancement in medical science. As people get older they consume more health care. Although the elderly currently constitute only 12 percent of the population, they account for more than 44 percent of all health care spending.17 That number will increase as the population continues to age. In addition, medical breakthroughs contribute to escalating medical costs for senior citizens. Even with existing technology, health care for the elderly will be expensive. And who can imagine what treatments and cures will be effected in the future? Fifty years ago, no one could have imagined the medical procedures that are commonplace today. Similarly, we cannot predict what medical science will achieve over the next 50 years. As diseases are eradicated and new treatments are developed, the cost of medical care will continue to increase.

Figure VII - U.S. Population%3A Trustees' Pessimistic Assumptions

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