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THE CENTURY FOUNDATION
41 E. 70TH STREET - NEW YORK, NY 10021
News
(212) 535-4441 WWW.TCF.ORG
Contact: Christy Hicks ~ Phone: (212)452-7723 ~ E-mail: [email protected]
FOR IMMEDIATE RELEASE
Aging Baby Boomers Won't Bust the U.S. Economy
A New Publication from The Century Foundation Offers the Basics for
Understanding the Real Issues of Public Policy in an Older America
The coming retirement of the baby boom generation is a topic that engenders much discussion and
debate in the media, on Capitol Hill, in state houses, and in board rooms. All too often, individuals
and groups promote their particular agendas with misleading statistics about the impact of the
aging of the population on the United States. But while the aging of the population is inevitable, a
financial crisis arising from that process is not.
Public Policy in an Older America, the latest entry in the Basics series published by The Century
Foundation, provides the best available facts, figures, and projections about the coming
demographic changes and the major questions they pose for public policy. After examining why
and how the U.S. population is aging, this guide to the issues explores how these changes will
affect income security and health care policy.
Other available titles in the Basics series that are related to Public Policy in an Older America
include: Social Security Reform, Medicare Reform, and Medicaid Reform. These and other guides
in the Basics series can be downloaded from The Century Foundation Web site at www.tcf.org.
The Century Foundation's Basics series offers readers a clear, succinct summary of essential facts
about important policy issues and unbiased assessments of strengths and weaknesses of reform
proposals in the news. These guides are important resources for legislators, journalists, students,
and the general public who want the facts and analysis without the rhetoric.
For more information related to aging policy, visit our subject area Web sites: The Social Security
Network (www.socsec.org) and Health Policy Watch (www.helathpolicywatch.com). Century
Foundation experts who are available for interviews or background discussions on these issues
include Richard C. Leone (president), Greg Anrig (vice president, program), Bernard Wasow
(senior fellow), and Leif Wellington Haase (health policy fellow). For more information or to
schedule an interview, please contact Christy Hicks at [email protected] or (212) 452-7723.
The Century Foundation conducts public policy research and analyses of economic, social, and foreign policy issues, including
inequality, retirement security, election reform, media studies, homeland security, and international affairs. The foundation produces
books, reports, and other publications, convenes task forces and working groups, and operates seven informational Web sites. With
offices in New York City and Washington, D.C., The Century Foundation is nonprofit and nonpartisan and was founded in 1919 by
Edward A. Filene.
III
BASICS
PUBLIC POLICY
IN AN OLDER
MERICA
A CENTURY FOUNDATION
GUIDE TO THE ISSUES
THE
BASICS
PUBLIC
POLICY
IN
AN
OLDER
AMERICA
A CENTURY FOUNDATION
GUIDE TO THE ISSUES
The Century Foundation Press
New York City
Copyright © 2006 by The Century Foundation, Inc.
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form or by any means, electronic, mechani-
cal, photocopying, recording, or otherwise, without the prior permission of The
Century Foundation.
Nothing written here is to be construed as necessarily reflecting the views of The
Century Foundation or as an attempt to aid or hinder the passage of any bill before
Congress.
94
THE BASICS SERIES
A
merica is engaged in difficult and complex policy debates over
critical issues. There are conflicting claims and disagreements
over the meaning of the facts and figures relating to the sig-
nificance of the social safety net, the way our political system works,
and the economic issues facing our nation. The Century Foundation
hopes to help clarify these issues by collecting the best available infor-
mation and presenting it in a series of pamphlets called The Basics.
The intent of this series is in keeping with the Foundation's man-
date. Since 1919, The Century Foundation, formerly the Twentieth
Century Fund, has sponsored and supervised research on eco-
nomic, social, and political issues. As a nonpartisan, but not neutral
organization, our underlying philosophy regards government as an
instrument, not an enemy, of the people, and therefore we strive, in
the words of our bylaws, for the "improvement of economic, indus-
trial, civic, cultural, and educational conditions."
The Century Foundation also believes in the power of well-
reasoned, well-researched ideas. These pamphlets are presented in
that spirit. They are our contribution to increased citizen under-
standing and wiser governmental decisions.
OTHER TITLES IN THE SERIES:
USA PATRIOT ACT
IMMIGRATION REFORM
TAX REFORM
BALANCING THE BUDGET
SOCIAL SECURITY REFORM
MEDICARE REFORM
MEDICAID REFORM
To order additional copies of this pamphlet or other Basics pam-
phlets, please contact the Foundation (see page 44).
3
CONTENTS
INTRODUCTION
6
I. OVERVIEW: How AND WHY THE U.S. POPULATION
WILL GROW OLDER
8
II. INCOME SECURITY AND OLDER AMERICANS
14
- III. HEALTH IN AN OLDER AMERICA
25
IV. CONCLUSION
38
NOTES
39
5
INTRODUCTION
M
uch of the media coverage and debate about the coming
retirement of the baby boom generation-the unusually
large number of Americans born between 1946 and 1964
is complicated and difficult to understand. All too often, individuals
and groups use misleading statistics to exacerbate fears about the
impact of the aging of the population on the United States in order to
promote their particular agendas. The resulting sense of foreboding
about the future created by such misinformation is conveyed in the
ominous titles of such books about the subject as The Coming
Generational Storm, The Great Bust Ahead, and Gray Dawn.
It is unquestionably true that the nation is "graying" and that the
share of the population in the workforce will decline relative to the
retired portion, posing significant economic and social challenges.
Debate has already begun over the future of government programs
such as Social Security and Medicare, which provide benefits to older
Americans financed through taxes paid mainly by workers. But while
the aging of the population is inevitable, a financial crisis arising from
that process is not.
America's capacity to adjust to the coming demographic changes
will depend on a number of factors. One is economic growth. If
America's economy expands robustly in the decades ahead, suffi-
cient resources will be available to make the transition to a larger
retired population relatively painless. The other critical wild card
is health care costs, which have grown much faster than the overall
inflation rate in recent years. Finding a way to bring those costs
under control-an enormous challenge-also would greatly help to
ease the adjustment to an older population.
6
The retirement of the baby boomers is not the only reason for the
"graying of the population." Another contributing factor is that life
expectancies have increased due to improvements in medicine and
public health, extending the average number of years that citizens
spend in retirement. In addition, fertility rates have declined, reduc-
ing the size of the average family and the rate of growth of the work-
force. Even without the aging of the baby boomers, those factors
would have caused the average age of the population to increase sig-
nificantly. Indeed, the populations of almost all other economically
advanced countries also are aging, many to a greater extent than in
the United States.
This Basics pamphlet, part of an ongoing series published by The
Century Foundation, is aimed at providing the best available facts, fig-
ures, and projections about the coming demographic changes and
the major questions they pose for public policy.
7
I. OVERVIEW: How AND WHY THE u.s.
POPULATION WILL GROW OLDER
?
WHO ARE THE BABY BOOMERS?
The huge baby-boom generation born between 1946 and 1964-now in
their 40s and 50s-will begin to reach retirement age at the end of this
decade. As they leave the workforce, the share of the U.S. population
age 65 and over will rise much more rapidly than it has in the past cen-
tury. As Figure A shows, the percentage of the population age 65 and
over will grow to 21.4 percent by 2050, compared to 12.4 percent in
2000 and 9.2 percent in 1960. The age group expected to grow most
rapidly of all will be those age 85 and over. 1
FIGURE A
Percent of Total Population Age 65 and Over
25
85+
65-84
20
15
10
-
5
0
Source: Data for 1900-2000 from Frank Hobbs and Nicole Stoops, Demographic Trends in the 20th
Century: Census 2000 Special Reports (Washington, D.C.: U.S. Census Bureau, November 2002),
p. 59, available online at http://www.census.gov/prod/2002pubs/censr-4.pdf; 2010-2050 projec-
tions from "U.S. Interim Projections by Age, Sex, Race, and Hispanic Origin," U.S. Census Bureau,
2004, available online athttp://www.census.gov/ipc/www/usinterimproj/natprojtab02a.pdf.
8
After 2040, when much of the baby boom generation will have passed
away, the share of the population age 65 and over is expected to level
off at about just over 20 percent of the total population. By 2050, the
portion age 65 to 84 is projected to drop to 15.7 percent, while those age
85 and over will constitute about 5 percent.
?
WHAT OTHER FACTORS CONTRIBUTE TO POPULATION AGING?
RISING LIFE EXPECTANCIES
Life expectancy has increased steadily and substantially during the past cen-
tury. Since 1940, life expectancy for newborns has increased from 61.4 years
to 74.6 for men, and from 65.7 to 79.6 for women. 2 (See Figure B.)
FIGURE B
Male and Female Life Expectancy
90
85
Female
80
75
Male
70
65
60
55
50
45
40
Note: Intermediate projections.
Source: 2005 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors
Insurance and Disability Insurance Trust Funds (Washington, D.C.: Government Printing Office,
2005), Table V.A3, available online at http://ssa.gov/OACT/TR/TR05/V_demographic.html#
wp151333.
9
In the first half of the twentieth century, reductions in infant and child
mortality rates mainly were responsible for life expectancy increases.
Improvements in public health, personal hygiene, and nutrition reduced
childhood deaths caused by infectious disease. More effective medica-
tions, including antibiotics such as penicillin, reduced deaths due to infec-
tious disease. In the second half of the century, improvements in life
expectancy increasingly have come about through medical interventions,
particularly in the treatment of cardiovascular disease, that extend the
lives of older people. 3
Life expectancy differs among groups: on average women live longer
than men, whites and Hispanics live longer than African Americans,4 4
and high-income individuals live longer than those with low incomes.
Because women's life expectancy is higher, women comprise a dispro-
portionate share of the elderly. In 2000, women constituted 59 percent of
the population age 65 and over and 71 percent of those age 85 and over. 6
10
DECLINING FERTILITY RATES
Fertility rates declined throughout most of the twentieth century until
leveling off in the 1970s, and have remained around 2.1 children per
woman for the past decade. (See Figure C.) At that "replacement rate,"
enough children are born to keep the population constant, excluding
immigration. Many other developed countries have fertility rates below
that replacement level and thus confront a future with declining popula-
tions in the absence of immigration. Although the reasons for declining
fertility rates are complex, contributing factors include changing social
attitudes toward having children, couples marrying later than in the past,
the higher participation of women in the labor force, and greater control
over family planning.
FIGURE C
Total Fertility Rates
4
3
2
1
Birth rate
Replacement rate
0
Source: Brady E. Hamilton, "Reproduction Rates for 1990-2002 and Intrinsic Rates for 2000-2001:
United States," National Vital Statistics Reports 52, no. 17 (March 18,2004): 7, Table 1, available
online at http://www.cdc.gov/nchs/data/nvsr/nvsr52/nvsr52_17.pdf
11
THE RELATIVELY MINOR ROLE OF IMMIGRATION
Immigration does not significantly affect age distribution because immi-
grants represent a relatively small percentage of the total population
(see Figure D), even though the average annual number of immigrants has
increased from about 100,000 a year in the 1940s to about 900,000 a
year in the 1990s. 8 While it is true that immigrants are much younger on
average and they contribute to overall population growth because of
their higher fertility rates, their fertility rates drop sharply with each gen-
eration born in the United States.
FIGURE D
Foreign-Born Population as a Percent of Total Population
14
12
10
8
6
4
2
0
1930
1940
1950
1960
1970
1980
1990
2000
Source: A. Dianne Schmidley, Profile of the Foreign-Born Population in the United States: 2000
(Washington, D.C.: U.S. Census Bureau, 2001), p. 9, available online at http://www.census.gov/prod/
2002pubs/p23-206.pdf.
12
?
How DOES THE UNITED STATES COMPARE TO
OTHER COUNTRIES?
The population of the United States is actually the youngest among the indus-
trialized countries. (See Figure E.) In 2000, when 12 percent of the U.S.
population was age 65 or older, that of other industrialized countries ranged
from 13 to 18 percent. Even by 2040, the U.S. population is still projected to
be the youngest, with 20 percent of the population age 65 and over, com-
pared to between 24 percent and 33 percent in other industrialized coun-
tries.
9
FIGURE E
Proportion of the Population Age 65 and
Older in Industrialized Countries
40
2000
2040
35
30
25
20
15
10
5
0
Canada
France
Germany
Italy
Japan
UK
US
Source: Author's calculations from U.S. Census Bureau, International Data Base (IDB), Table 094,
available online at http://www.census.gov/ipc/www/idbsprd.html.
13
II. INCOME SECURITY AND OLDER AMERICANS
Older Americans today are financially better off than those in previous
generations, in large part because of improvements in Social Security.
Nonetheless, many older people remain very close to the poverty line and
are more vulnerable to changes in income than is widely believed. One factor
in the continuing dependence of most retirees on Social Security is that
traditional pensions now cover a smaller share of the workforce than in the
past. In addition, personal savings rates among workers have declined. As a
result, the retirement prospects for today's workers are likely to be worse
than those of current retirees; that is, future retirees will be more, rather than
less, dependent on Social Security.
?
How POOR ARE THE ELDERLY?
Today's seniors are much less likely to be poor than those in previous
generations. Poverty rates among older people have declined steadily dur-
ing the past forty years, largely due to the expansion of Social Security
benefits to more Americans and the indexing of its benefits to inflation,
plus the creation of Medicare in 1965 and subsequent improvements in
that program. (See Figure F.) In 1959, the poverty rate for the elderly
was 35 percent; it is now around 10 percent. 10
Rates of poverty and near-poverty among the elderly increase with age as
retirees exhaust their retirement savings. 11 Note that a very high portion
of the elderly live just above the poverty level at all ages, putting them at
high risk of falling into poverty if Social Security, Medicare, and Medicaid
benefits were to be cut. (See Figure G.)
14
FIGURE F
Poverty Rate, Age 65 and Over
30
25
20
15
10
5
0
2000
Source: Historical'Poverty Tables, Table 3, "Poverty Status of People, by Age, Race, and Hispanic
Origin: 1959 to:2004," U.S. Census Bureau, 2005, available online at http://www.census.gov/hhes
/www/poverty/histpov/hstpov3.html.
FIGURE G
Poverty and Near Poverty by Age, 2002
25
Percentage below poverty line
Percentage below 125% of poverty line
20
15
10
5
0
65-69
70-74
.75-79
80 or older
Source: Income of the Population 55 and Older, 2002 (Washington, D.C.: Social Security
Administration, March 2005), Table- 8.2, p. 144, available online at http://www.ssa.gov/policy/
docs/statcomps/income_pop55/2002/sect8.pdf
15
Elderly women are at higher risk of falling into poverty than elderly men.
Among Americans age 65 to 69, over 10 percent of women live in poverty
compared to just 7 percent of men. The gap is even greater among the
very old, with nearly double the percentage of women over the age of
80 living in poverty than elderly men. (See Figure H.) There are a num-
ber of reasons for this. First, women on average have lower lifetime earn-
ings, SO their Social Security and pension benefits are somewhat lower. In
addition, wives are much more likely to outlive their husbands and draw
down their family assets.
FIGURE H
Poverty among Older People by Gender, 2002
16
Men
14
Women
12
10
8
6
4
2
0
65-69
70-74
75-79
80 or older
Source: Income of the Population 55 and Older, 2002 (Washington, D.C.: Social Security
Administration, March 2005), Table 8.2, p. 144, available online at http://www.ssa.gov/policy/docs
/statcomps/income_pop55/2002/sect8.pdf
?
WHAT ARE THE MAJOR SOURCES OF RETIREMENT INCOME?
Nearly two-thirds of older Americans rely on Social Security for at least
half of their income, 12 and 21 percent of older Americans depend on
Social Security for all of their income. 13
Unmarried people age 65 and
over are particularly reliant on Social Security as a source of income.
(See Figures I and J.) Those who are less reliant on Social Security have
the highest incomes, with earnings from work, pensions, and assets pro-
viding most of their additional resources.
16
FIGURE I
Income Sources for Married Couples, 65 and Over, 2002 (by quintile)
100
Other
80
Public
assistance
60
Income
from assets
Earnings
40
Pensions
20
Social
Security
0
First
Second
Third
Fourth
Fifth
Note: Quintile limits are $18,648, $27,744, $39,000, and $63,108 for married couples.
Source: Income of the Population 55 and Older, 2002 (Washington, D.C.: Social Security
Administration, March 2005), Table 7.5, p. 137, available online at http://www.ssa.gov/policy
docs/statcomps/income_pop55/2002/sect7.pd
FIGURE J
Income Sources for Unmarried People, 65 and Over, 2002 (by quintile)
100
Other
80
Public
assistance
60
Income
from assets
40
Earnings
Pensions
20
Social
Security
0
First
Second
Third
Fourth
Fifth
Note: Quintile limits are $7,892, $11,448, $15,638, and $24,855 for unmarried persons.
Source: Income of the Population 55 and Older, 2002 (Washington, D.C.: Social Security
Administration, March 2005), Table 7.5, p. 137, available online at http://www.ssa.gov/policy/docs/
statcomps/income_pop55/2002/sect7.pdf.
17
SOCIAL SECURITY
Each individual's Social Security retirement benefits are determined based
on average earnings over his or her working years. Higher lifetime earn-
ings result in higher benefits up to an inflation-adjusted cap. The full
benefit currently is payable at age 651/2 (scheduled to rise gradually to
67 in 2022); workers who retire at age 62 get a reduced benefit. Workers
who postpone retirement beyond age 65 1/2, up to age 70, get a higher
benefit when they stop working. (See Figure K.)
FIGURE K
Hypothetical Benefit Amounts for a Person
Who Claimed Social Security Benefits in January 2003
2,000
Age 62
Age 65
1,500
1,000
500
0
Low earner
Average earner
Maximum earner
Note: Low earnings are 45 percent of the national average index, average earnings are equal to the
index, and maximum earnings are equal to OASDI contribution and benefits base.
Source: "Fast Facts & Figures About Social Security, 2004," Social Security Administration, August
2004, p. 16, available online at http://www.ssa.gov/policy/docs/chartbooks/fast_facts/2004
fast_facts04.pdf.
18
Because Social Security is a social insurance program, it is structured SO
that someone who has had a lifetime of high wages (and was therefore
able to save money for retirement) does not have as much of his or her
income replaced upon retiring as does a low-wage earner. In other words,
while those who earned higher wages get a larger check than those who
earned less, the check represents a smaller percentage of their average
past earnings. Workers with a very low wage are guaranteed a minimum
benefit. 14 This progressive feature of Social Security helps give all work-
ers in America a chance at a decent retirement, even if the type of work
they did, or their personal circumstances, did not enable them to accu-
mulate wealth or become eligible for a private pension plan.
The Social Security benefits of an average-wage earner with a spouse retir-
ing at age 65 in January 2004 were 62.9 percent of his or her average
earnings, while comparable figures for low- and maximum-wage earners
were 84.8 percent and 44.6 percent, respectively. (See Figure L.) Those
percentages will decline somewhat in the future, mainly because of the
scheduled delay in the age when full retirement benefits can be collected.
FIGURE L
Social Security Wage-Replacement Rates, January 2004
(workers age 65, with and without a spouse)
90
Workers age 65
80
Workers age 65 with a spouse
70
60
50
40
30
20
10
0
Maximum-wage earner
Medium-wage earner
Low-wage earner
Note: A maximum-wage earner is defined as $72,019, medium as $33,897, and low as $15,253.
Source: Performance and Accountability Report for Fiscal Year 2004 (Washington, D.C.: Social
Security Administration, 2004), p. 9, available online at http://www.ssa.gov/finance/2004/Full
_FY04_PAR.pdf.
19
PRIVATE PENSIONS
The share of the workforce covered by pension plans has fallen over the past
twenty-five years, reflecting the decline of employment in the highly unionized
manufacturing sector and the increasing prevalence of voluntary plans. 15
Moreover, pension plan types have changed substantially over the past few
decades. Defined benefit plans-which offer guaranteed benefits based on
previous earnings and the number of years worked-have gradually become
less common. Emerging in their stead have been defined contribution plans,
which invest workers' (and sometimes employers') contributions. (See Figure
M.) The main consequence of that transformation is that companies have
transferred much of the future risk for providing pensions onto the shoulders
of their workers.
FIGURE M
Percentage of Participants in Pension Plans
35
30
25
20
15
10
5
Workers covered by a defined benefit plan only
Workers covered by both defined benefit and defined contribution plans
Workers covered by a defined contribution plan only
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
Note: Some workers are covered by more than one defined contribution plan.
Source: Private Pension Plan Bulletin: Abstract of 1999 Form 5500 Annual Reports (Washington,
D.C.: U.S. Department of Labor, Employee Benefits Security Administration, Summer 2004), Table
E4, p. 78, available online at :http://www.dol.gov/ebsa/PDF/1999pensionplanbulletin.pdf.
20
For the most part, coverage rates increase for workers with higher
incomes. 16 For example, participation in 401(k)s-a type of defined con-
tribution plan that allows workers to contribute a portion of their earnings
on a pre-tax basis-and similar plans increases with earnings and educa-
tion. 17 Those with college degrees are twice as likely to have 401(k)s or
thrift savings plans than those with only high school diplomas. 18 Those in
the top fifth of the income distribution are more than twice as likely to
have such plans as workers in the middle of the income distribution, and
more than ten times as likely as those in the bottom fifth. 19
Although defined contribution plans offer the advantage that they are
portable from one job to another, they mean that workers increasingly are
reliant on stock market performance for their retirement incomes. Pension
defaults, such as those in the airline and steel industries, reinforce the
extent to which workers can no longer depend on traditional defined
benefit plans.
Experiments have shown that participation in defined contribution plans
will rise significantly if they are the "default option" for workers. That is,
when workers are informed that, unless they opt out, a small percent of
their salaries and their raises will be directed to a safe, diversified invest-
ment vehicle, most go along with this option. 20
21
PERSONAL SAVING
The current personal savings rate is low both by U.S. historical standards and
in comparison to that of other wealthy countries. No one is completely sure
what the reason is. The savings rate in the United States, as Figure N shows,
has dropped sharply over the past several decades, becoming negative in 2005.
FIGURE N
Personal Savings Rate (as a percentage of disposable income)
12
10
8
6
4
2
0
-2
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Source: National Income and Product Accounts (NIPA), Department of Commerce, Bureau of
Economic Analysis, Table 2.1. Personal Income and Its Disposition (Line 34), available online at
http://www.bea.gov/bea/dn/nipaweb/TableView.asp?SelectedTable=58&FirstYear=2003&LastYea
=2005&Freq=Qtr.
The decline in U.S. savings has occurred even though the federal govern-
ment has enacted a variety of measures, such as Individual Retirement
Accounts and 401(k)s, intended to encourage saving by providing indi-
viduals with tax benefits if they set money aside. One reason why those
policies have not been effective in encouraging new savings is that they
only reward households that pay a significant amount in income taxes. A
large portion of the population with modest or low incomes does not
owe sizeable income taxes and therefore would not benefit much from the
existing tax-favored accounts. 21
22
?
WHAT ARE THE RETIREMENT PROSPECTS FOR
TODAY'S WORKERS?
Baby boomers, on average, have higher incomes and have accumulated
more wealth than their parents' generation. 22 Several studies conclude
that boomers are on track to be better off in retirement than their par-
ents and are less likely to become poor. 23 But while boomers, on average,
may be better off, the retirement prospects of a large segment of that gen-
eration are uncertain or bleak. A Congressional Budget Office review
concluded that, although half of boomer households are on track to
maintain the same standard of living upon their planned retirements,
about a quarter of boomer households-mainly those with low
incomes-have saved very little and will most likely see their standard of
living decline significantly upon retirement. The remaining quarter has an
uncertain future-one that could tip either way in the face of a slight
change in circumstances. 24
There are wide disparities in savings and wealth among those in their
pre-retirement years (age 55 to 64, although some of these people may
already be retired). (See Figure O.) Those in the top income quintile have
a net worth of about fifteen times that of those in the lowest quintile. 25
Excluding the value of one's home (which often comprises the majority of
an individual's wealth), this disparity is even higher.
FIGURE O
Median Net Worth by Income Quintile, Age 55-64
350,000
Median net worth
300,000
Median net worth excluding home equity
250,000
200,000
150,000
100,000
50,000
0
First
Second
Third
Fourth
Fifth
Note: Quintile limits for monthly income are $1,304, $2,426, $3,813, and $5,988.
Source: Survey of Income and Program Participation, 1996 Panel, U.S. Census Bureau, p. 11, available
online at :http://www.census.gov/prod/2003pubs/p70-88.pdf.
23