As a wealth of gerontological research by researchers of multiple perspectives has shown, outcomes of old-age policies reflect complex interactions between ...
Book Reviews Robert H. Binstock, PhD, Editor
THE FUTURE OF OLD-AGE BENEFITS
The Economics of an Aging Society, by Robert L. Clark, Richard V. Burkhauser, Marilyn Moon, Joseph F. Quinn, and Timothy M. Smeeding. Blackwell Publishing, Malden, MA, 2004, 362 pp., $34.95 (paper). The appearance of this much-needed text is certainly timely, as students and other citizens are more than ever in need of tools to help them evaluate competing claims related to old-age policies. As the first of the baby boomers approach age 60, calls for ‘‘reform’’ of an allegedly ‘‘unsustainable’’ system of old-age benefits are back in full chorus. President George W. Bush, for example, began his second term with a national ‘‘road show’’ on the need for basic structural changes to reduce the future financial demands of the Social Security program—although the initial response in terms of public opinion was much less favorable than that from the carefully prescreened road show audiences. Of the Big Three entitlement programs—Social Security, Medicare, and Medicaid—Social Security is actually on the soundest financial footing. Currently, in fact, revenues exceed expenditures by a considerable margin—$145 billion in 2004—adding to the trust funds and helping to mask the increasing deficits in the rest of the budget. According to the 2005 Social Security trustees’ projections, the trust funds are currently projected to last until about 2041 (Board of Trustees, 2005). At that point—assuming that no changes at all had been made in the interim—ongoing tax revenues would be enough to pay about 74% of projected benefits, and the remaining 26% gap would need to be covered by some combination of revenue increases and benefit reductions. The gap could also be closed by more modest changes enacted sooner. And, of course, funding private accounts would do nothing to solve Social Security shortfalls but rather would require vast new borrowing. It is also interesting to note that the official projections of Social Security shortfalls, often cited by the president, assume growth in real gross domestic product of 2.7% per year until 2014, declining thereafter to 1.8% by 2080 based on projections of labor supply and other constraints. In contrast, the claim that beneficiaries would come out ahead on private accounts implies more vigorous growth, as this requires that investments in these accounts grow by at least three percentage points per year Vol. 45, No. 4, 2005
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more than the inflation rate (Weisman, 2005), which is likely to require concomitant rates of growth in the underlying economy. If the economy grew at a rate sufficient to support long-term real growth in investments of 3% more than inflation, payroll tax revenues would probably be sufficiently robust to fill much of the funding gap for traditional Social Security. Even under the official assumptions, the long-term shortfall in Social Security funding is comparable in size to the gap that was filled, without major trauma, by bipartisan action in 1983. At that time, however, Social Security reform was merely a financial rather than an ideological issue and could therefore be addressed in a bipartisan fashion. Whatever its immediate outcome, putting the basic structure of Social Security in play with a presidential proposal for partial privatization via a system of personal accounts represents a watershed in the ongoing American dialogue about old-age policy. With respect to Social Security at least, there has arguably been a basic consensus on basic principles—and on the societal function of a universalistic system—from the New Deal, through Johnson’s Great Society, Nixon’s Social Security expansions, and (despite some Gingrichera rumblings) right up into the budget surplus years of the late Clinton era. This no longer seems to be the case. Claims of an attempt to repeal the New Deal might be a bit overblown, but according to a memo to presidential political director Karl Rove from his deputy, Peter Wehner, ‘‘For the first time in six decades, the Social Security battle is one we can win—and in doing so, we can help transform the political and philosophical landscape of the country’’ (Alter, 2005). And the ideological clashes underlying reform of health financing make the Social Security debate look simple. About the only thing that the parties claim to agree on is that the public needs to become much better educated on the issues of financing the needs of an aging society. Thus, there is a great need for books like The Economics of an Aging Society, by Robert L. Clark, Richard V. Burkhauser, Marilyn Moon, Joseph F. Quinn, and Timothy M. Smeeding. Although much has been written on these issues, there is a need for a comprehensive overview—particularly as there appear, unfortunately, to be no plans for another edition of James Schulz’s The Economics of Aging, a classic, solid, yet accessible text that has been updated in seven
editions since 1976 (e.g., Schulz, 2000). Clark, Burkhauser, Moon, Quinn, and Smeeding are all highly regarded economists who have worked extensively on problems of aging and bring a wealth of expertise and experience to their task. As good economists, the authors seek to demonstrate the utility of classical tools of economic analysis in understanding old-age policies, with an emphasis on the impact of programs on economic decisions of consumers, such as retirement and savings behavior, and on the applications of economic models. These discussions will provide attentive students with useful tools for considering trade-offs between multiple program objectives, such as considerations of need and adequacy versus economic efficiency. The book would therefore be particularly useful as, for example, the text for an undergraduate course on the economics of aging. It is structured in textbook fashion, with learning objectives at the beginning of chapters and discussion questions at the end. Old-age policy is, of course, also of interest to a much broader range of students in a broader range of courses. Indeed, a stated goal of the book is to provide students with a balanced overview of the economic and policy implications of individual and population aging. This is, however, a considerable challenge, even in a book of some 362 pages. It is a challenge for several different reasons. The programs are complex and, when presented in the abstract, can make rather dry going for the student. More important, these programs are complex social institutions whose forms reflect the interaction of many political, historical, demographic, cultural, and other societal forces as well as economic considerations. As a wealth of gerontological research by researchers of multiple perspectives has shown, outcomes of old-age policies reflect complex interactions between these institutions and individual life course events, ranging from health changes to marriage, divorce, and widowhood as well as employment-related decisions. An interdisciplinary perspective is needed to adequately understand the social problems that institutions of aging policy were created to address, to evaluate the likely effects of reform proposals, and to make sense of our old-age benefits as the lively, controversial, interesting, and evolving programs that they are. In interpreting these phenomena, however, The Economics of an Aging Society emphasizes rather heavily the methods and modes of classic economic analysis, such as the use of economic models. This emphasis may not provide students and other readers with the full picture that they need to make sense of programs like Social Security, Medicare, and Medicaid, as well as the broader issues confronted by aging societies. In particular, a broader perspective could have been achieved with more attention given to the issues of economic and health inequality, particularly in a life course perspective; to cross-national comparisons; to market imperfections and the limitations as well as the explanatory ability of classical economic models (particularly in health care); and to political and sociological as well as classical economics perspectives on social programs for elders and late-life financial outcomes. This comment, on what is a solid and highly informative text, is not 554
meant as a quibble. Rather, it is motivated by the concerns expressed in the introductory paragraphs of this review essay. I would argue that this broader perspective is an essential context for evaluating arguments of great import for the society, in what can be expected to be a continuing national debate on the future of the social safety net for aging Americans. I hasten to add that the lack of adequate attention to these issues is a problem, not just for this book, but in the larger public debate over entitlement reform.
The Problem of American Exceptionalism A common thread across these issues is the theme of American exceptionalism in aging policy, as in social policy in general. Indeed, many current struggles involve proposals to make aging policy more exceptional from an international perspective. An essential starting point for discussion of reform proposals for health care for elders is that the United States, while having a less complete and more fragmented system of health coverage than other developed nations, also (and not coincidentally) spends much more on health care than those nations. The Organization for Economic Cooperation and Development (OECD) has estimated, for example, that in terms of purchasing-power-adjusted dollars, we spend 47% more per capita on health care than the next highest-spending country (Switzerland), 75% more than our neighbor Canada, and 127% more than the OECD median (Reinhardt, Hussey, & Anderson, 2004). In its chapters on health care financing, The Economics of an Aging Society presents a solid overview of Medicare basics and financial trends, the impact of population aging on the program, and such matters as Medicare supplementation and reform proposals. It does not, however, allocate space to cross-national comparisons. For students and other citizens who need to be able to evaluate reform proposals, this broader context is essential background, because many recent Medicare reform proposals have aimed to make the program more like the ‘‘mainstream,’’ employer-based system; the recently enacted Part D prescription drug benefit represents a step in this direction. Some of the cost difference for U.S. health care can be explained by greater use of high-technology medical procedures but not as much as is often believed. Overall, Americans do not use particularly high levels of most health care services compared to other developed countries; for example, among OECD nations we are in the lowest quartile of hospital beds per capita, and have fewer physicians and nurses per capita than the OECD median. Most of the spending difference appears to be due to the higher prices, high administrative overhead, and other inefficiencies that may be inherent in the highly fragmented, multipayer structure of our health care system. In such a system, providers have greater pricing power than in most national health systems, and a high share of revenues goes to a variety of middlemen. With so much at stake, both of these groups invest heavily in protecting their piece of the The Gerontologist
pie, becoming important political actors with a powerful voice in policy debates. Although the public health insurance programs such as Medicare have, so far at least, much lower administrative costs than other parts of the health care system, they are certainly not immune to these cost pressures. Indeed, it has been the experience and anticipation of out-of-control costs that have historically functioned as the brake to efforts to fill some of the gaps in health programs that are well described by Clark and colleagues. This has led to a cycle of expansion and contraction over the years, as new benefits are enacted to address unmet needs, followed by strife over who is to pay the bill. Ironically, although public payers cover a smaller share of overall health care expenditures than in other developed countries, their expenditures now actually exceed the entire national health expenditures of many of the developed countries, in relation to total population. In this context, it is hardly surprising that the sustainability of these programs is questioned. But in evaluating the causes of and remedies for these problems, and attempting to move beyond the Sisyphean cycle of expansion and retrenchment, critical examination of structural choices is essential. Cross-national analyses are an important element in the needed national dialogue. Medicare’s original enactment, and subsequent expansions, were initially opposed by powerful vested provider interests who feared the potential impact on their revenues of the pooled purchasing power that would be created. In the dance of legislation, such opposition was typically bought off by legislative provisions that restricted the exercise of this purchasing power and protected provider incomes. Thus, for example, hospitals were originally reimbursed based on their reported costs, and physicians on their ‘‘usual and customary’’ fees. These deals tended to break down later on during cycles of retrenchment once costs had sufficiently ballooned (as with the establishment in the 1980s of diagnostic-related-group reimbursement for hospitals and the resource-based relative value scale for physician reimbursement) but at relatively high base price levels. This dynamic may be repeating itself with Medicare prescription drug coverage, which is designed to disperse drug purchasing among a host of privately managed prescription drug plans rather than to permit Medicare to negotiate for drug prices centrally, as do the Veterans Administration and most national health systems. To reinforce this, the legislation includes a provision prohibiting Medicare from negotiating centrally for drug prices, defined as ‘‘interference’’ with the operations of the private plans. However, by making the implicit limitations on Medicare’s purchasing power so explicit, this provision may have unintentionally provided a focal point for rear-guard actions by critics of the legislation. The legislation, by creating a panoply of plans among which beneficiaries will need to shop and choose, may also have the unintended consequence of drawing greater attention to the disparity between drug prices in the United States and those in other countries where prices are negotiated centrally. Vol. 45, No. 4, 2005
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‘‘Assume an Efficient Market’’ That health care prices are political matters is not, of course, unique to the United States. They are political matters all over the world. Indeed, part of our problem may be that we often avoid acknowledging this fact and pursue indirect approaches to cost containment that add to the costs and fragmentation of the system. In a political culture with a high level of distrust for governmental solutions to social problems—aided and abetted by well-financed campaigns by powerful interest groups—it is appealing to elected officials to seek to take government ‘‘out of the loop’’ as much as possible, at least with respect to pricing. As one slightly confused senior is said to have put it, ‘‘Get the government out of my Medicare!’’ But, of course, this is not so simple. In fact, a central problem in our national dialogue about health care policy has been the general lack of clarity and confusion over both the role and limitations of ‘‘market-based’’ reforms in a health care system in which many of the central assumptions of classical economic analysis are invalidated in numerous ways. These include: the presence of insurance that separates the user and payer of the services; inadequacy, asymmetry, and high costs of information; primitive measurement of quality; problems of moral hazard and adverse selection; issues of professional agency; and numerous others. The book provides insight into some of these problems, for example, in its discussion of the problem of inadequate risk adjustment for Medicare’s managed care program. But a more fundamental analysis of market imperfections, and the prerequisites, overhead costs, general efficiency, and limitations as well as potentials of market-based reforms of publicly financed health care, could have strengthened the discussion of Medicare reform. These are challenging but vital issues for students and other citizens, and help from the best minds in health economics is much needed here. Again, there is now a range of international experience to draw from, as many of the developed nations are now exploring such models. It is particularly important to provide students with the tools to examine these issues, as they underlie dramatically different political visions of the future of Medicare and go to the heart of the question of the practicality of proposals to reorganize Medicare into a system of competing private plans. The key question is whether such changes would make Medicare into a leaner, meaner system or just one that is meaner and plagued by further fragmentation and overhead costs. Do we have the right medicine, or should we be heeding the clinical maxim ‘‘first, do no harm’’?
Inequality, Cumulative Advantage, and Social Security With Social Security back in political play, it is appropriate that much of The Economics of an Aging Society focuses on the economic well-being of elderly Americans and on Social Security financing issues. This discussion will provide students with a good understanding of Social Security’s rules and structure, even
providing worksheets that they can use to calculate their own Social Security benefit. Census income data are used extensively to illustrate trends in mean income. These sections provide a good overview of the role of various income sources in elders’ overall income, although it would have been helpful to address, both pedagogically and substantively, some of the methodological challenges and controversies in measuring income (and assets), particularly with Census data. In addressing the issue of adequacy, the authors focus on rates of poverty as measured by the official poverty lines. Here, they do address methodological controversies and provide a thoughtful discussion of methodological issues in measuring poverty, which will make the fundamentally arbitrary nature of the official measure fairly clear to students. However, there is little attention paid to broader measures of later life income distribution and inequality, to the association of economic and health disadvantage, or to comparative analyses of old-age inequality. These topics seem, for whatever reason, to have received much less attention in general from economists than from sociologists, which is unfortunate, particularly at a time of proposed Social Security privatization. In many respects, distributional issues are at the heart of what is at stake, both in Social Security debates and in those surrounding health care financing. A focus on poverty status alone provides only a very imperfect perspective on these issues. Such analyses typically show that our nation has done fairly well over time in reducing the proportion of elders in official poverty; but they tell only part of the story. The lack of attention to broader distributional issues is puzzling given that Smeeding, for example, has done much in other work to call attention to the plight of the large number of elderly Americans clustered in the near-poor range, the so-called ‘‘tweeners’’ whose incomes are too high to qualify for most means-tested benefits yet too low to meet many of their needs. It is this group that is at greatest risk from proposals to move both Social Security and Medicare from traditional defined-benefit models closer to defined-contribution program models. As much research has shown, income inequality increases within cohorts of Americans as they enter later life, economic resources among elders are very heavily concentrated within the upper part of the income distribution, strong association exists between poor health and economic disadvantage, and late-life inequality is substantially higher in the United States than in most developed countries (‘‘American exceptionalism’’ again). These outcomes are not preordained but reflect in part specific policy choices. An understanding of these issues is essential information for students in a period when basic restructuring of the social safety net for elderly Americans is being proposed. For example, it is the redistributional features of Social Security, which are at risk in privatization proposals, that have prevented old-age inequality from being far worse. Without a clear understanding of the problems that these redistributional features are addressing, it will be difficult to retain them as citizens are encouraged to 556
demand the highest possible return on their individual payroll tax contributions.
Peering Into the Future Policy controversies surrounding programs like Social Security are unusual in that they require us to project many years into the future. What can economic analysis tell us about the circumstances that will be faced by coming generations of elders and by the society that will need to pay for their benefits? Practitioners of the arcane art of economic forecasting and simulation modeling have made many efforts to address these questions, although The Economics of an Aging Society is appropriately cautious in discussing such projections. But the long-range implications of certain current policy choices, in the context of population aging, deserve perhaps more discussion. Taxation policies are central among these, as the sustainability of social welfare benefits depends on both the revenue and expenditure sides of the equation. And this is certainly an area in which historical and (despite American exceptionalism) comparative analysis could be helpful. A closely related issue is the potential future level of old-age inequality and the potential impact of current policy decisions on this outcome. Not to put too fine a point on it: looking down the road, is it possible that a ‘‘perfect storm’’ may be brewing for nonaffluent elderly Americans (let’s say, those in the lower two fifths of the income distribution)? Because Social Security represents the bulk of this group’s income, they possess little fungible wealth, and they are likely to be highly dependent on the programs currently being attacked as ‘‘unsustainable’’ and to have limited ability to bear the burdens and risks of a shift away from defined-benefit programs. On the issue of sustainability, amidst the current predictions of insolvency and oncoming generational storms as the baby boom generation reaches old age, it is worth noting that there is nothing particularly novel about the population age structure that the United States will be facing. It has already been attained by a number of other developed nations. What is exceptional and indeed radical—both historically and comparatively— is the erosion in governmental revenues created by recent tax cuts. According to Congressional Budget Office estimates (CBO, 2005), federal revenues declined from 20.9% of gross domestic product (GDP) in 2000 to 16.3% in 2004, a level not seen since the Eisenhower Administration. At this level of revenues, and with further tax cuts on the agenda, old-age entitlements may well be unsustainable, but it seems hardly cricket to blame either demography or the insatiable appetites of ‘‘greedy geezers’’ for more services. Rather, the increasing calls by politicians for sacrifice by coming cohorts of elders seem reminiscent of the plaints of the man on trial for murder of his mother and father, who asked the court for mercy on the grounds that he was now an orphan. Finally, given the role of Social Security and other defined-benefit programs in buffering the forces leading to old-age inequality, what challenges in this regard can The Gerontologist
be expected in coming years? Will underlying trends in the economy, such as globalization, increasing educational requirements for well-paying positions, growing salary disparities between a cognitive and managerial elite and everyone else, the decline in skilled manufacturing jobs, a flatter income tax structure, the effective elimination of inheritance taxation, and other changes add to the forces driving inequalities while the moderating effects of defined-benefit programs decline? Projecting the economic and social environment for elderly citizens and policies many decades into the future is a highly risky enterprise, but it is important to start by asking the right questions. It has been said that elders are the only minority group that other members of society expect and aspire to eventually join (although some survey research suggests that a high proportion of Americans, at many economic levels, expect to join the wealthy as well, which may help explain the relatively muted opposition to tax cuts for the rich). Meeting the needs of the growing elderly population is a large and central economic task for every developed society. The social welfare institutions that have developed to address these needs are complex entities that challenge the student and the citizen to understand. Yet if the influences of special interests and political marketing are to be balanced by anything approaching democratic decisionmaking on these important issues, better public understanding of them is essential, including the interactions among economic, political, historical, life course, and other factors that shape the structure and outcomes of these programs. Students who diligently peruse The Economics of an Aging Society will have an excellent head start in this effort, which is probably about as much as can be expected of one book. For readers of The Gerontologist in their diverse roles as educators, the challenge will be even greater as we attempt to improve public understanding of the issues behind the controversies over the future of the aging safety net. Like Clark and his
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colleagues, we are challenged to communicate the complexities and multiple dimensions of these issues without getting lost in the maze. These complexities have the potential to discourage real public dialogue and to play into the hands of political scriptwriters and vested interests. But while the details may be arcane, the stakes for older people and the society are considerable. As we enter a period of renewed contention over the future of Social Security, Medicare, and Medicaid, increased public understanding and dialogue on these issues will be needed as never before. Stephen Crystal, PhD Research Professor and Chair, Division on Aging Director, Center for Pharmacotherapy, Chronic Disease Management, and Outcomes Associate Institute Director for Health Services Research Institute for Health, Health Care Policy, and Aging Research Rutgers University New Brunswick, NJ 08901
References Alter, J. (2005, February 18). FDR’s ‘‘forgotten man’’ at risk. Los Angeles Times, Retrieved February 18, 2005, from http://www.latimes. com/news/opinion/commentary/la-oe-alter18feb18,0,406204.story?coll¼ la-news-comment-opinions Board of Trustees. (2005). The 2005 annual report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds. April 5. Washington: U.S. Government Printing Office. http://www.ssa.gov/OACT/TR/TR05/tr05.pdf Congressional Budget Office. (2005). The budget and economic outlook: Fiscal years 2006 to 2015, release date January 25, Appendix F. Washington, DC: U.S. Government Printing Office. Reinhardt, U., Hussey, P. S., & Anderson, G. F. (2004). U.S. health care spending in an international context. Health Affairs, 23(3), 10–25. Schulz, J. H. (2000). The economics of aging (7th edition). Westport, CT: Auburn House. Weisman, J. (2005, February 3). Participants would lose some profits from accounts. The Washington Post, Retrieved February 3, 2005, from http:// www.washingtonpost.com/wp-dyn/articles/A59136-2005Feb2.html
