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BOOK REVIEW |
Professor of Social Work and Public Administration School of Social Work College of Human Services and Health Professions Syracuse University Syracuse, NY 13104
Policies for an Aging Society, edited by Stuart H. Altman and David I. Shactman. The Johns Hopkins University Press, Baltimore, MD, 2002, 402 pp., $24.95 (paper).
Stuart Altman and David Shactman bring together an impressive group of scholars to assess the economic and budgetary consequences of funding retirement income and health policies. Policies for An Aging Society examines uncertainties, policy quandaries, and choices associated with the aging of America. As their overview chapter exemplifies, this collection of well-written essays provides students, policymakers, researchers and the reading public with access to carefully developed views about how to approach and address these challenges. Broad agreement can be found for the view that the United States faces formidable challenges due to the aging of the baby boom birth cohort. Less agreement exists about the size of the problem or the preferred trajectory of reform, leading the editors to conclude that the "major program reforms are at least as much a matter of values as they are of economics" (p. 32).
A thoroughly useful volume, Policies for An Aging Society is well suited for adoption in courses addressing the politics and economics of aging. Anyone wishing to be introduced to the complexities—and differing views—surrounding the future of retirement income and health policies would do well to consult this book. They will find, however, that inadequate attention is given to caregiving and care work as emerging policy concerns. Moreover, issues related to racial and ethnic diversity, both within future cohorts of the old and between tomorrow's young and old, require more discussion.
Uncertainty
"The United States has entered the twenty-first century with a balanced budget and an unprecedented period of continuous economic prosperity" (p. 3), the opening sentence of the book opines. How quickly things have changed! Since the manuscripts for this volume were written, substantial tax cuts, increased defense and homeland security spending, and the addition of pharmaceutical benefits to Medicare have turned a projected 10-year federal budget surplus of 5.6 trillion dollars for the 2002–2011 period into a projected 2 trillion dollar deficit for the 2005–2014 period. This does not include many costs connected to maintaining the nation's military operations in Iraq; neither does it reflect the Bush Administration's proposal to make the recent tax cuts permanent (Oppel, 2004).
Plainly, policymakers need some understanding of probable futures, but how much faith ought be placed in budgetary and Social Security and Medicare financing forecasts? How much can we know about the future? How should forecasts be used? How can we deal with the problem of uncertainty?
Two chapters discuss these issues. Economists Eugene Steuerle and Paul Van de Water introduce readers to many issues surrounding the use of long-term budget projections, including underlying assumptions, sensitivity of assumptions, volatility, and applications in the policy process. In addition to projecting levels of federal expenditures and receipts 10 years out, the Congressional Budget Office (CBO) tries to assess the potential long-term effect of deficits and the accumulation of debt on the economy. Social Security's and Medicare's actuaries produce estimates of program costs 75 years into the future.
The longer the time period that projections cover, the more they are bounded by uncertainty. Seemingly small changes in demographic (e.g., life expectancy), economic (e.g., real wages) or health cost (e.g., rate of increase relative to worker's wages) variables result in very different assessments of long-run costs. Moreover, current policy, the economy, and expected demographic trends are subject to change. As Brookings economist Henry Aaron notes, we often know the direction of anticipated changes and in very broad terms whether these changes are large or small. We know that certain changes, such as declines in fertility, increased life expectancy, and productivity increases have large impacts. But the magnitude and timing of anticipated change are difficult to forecast with accuracy. Hence, as Steuerle and Van de Water state, it is not surprising that "no government agency has yet produced consistent long-run estimates of the economic and budgetary effects of specific policy proposals" (p. 97).
In light of this uncertainty and potential volatility, how are policymakers to decide about Social Security and health care reform options? Aaron suggests it is important to understand that addressing many of the most important retirement income and health policy questions do not require highly refined long-term projections. "The advantage of public versus private management or of DB [defined benefit] versus DC [defined contribution] pensions do not depend on any long-term projection other than whether the future will be radically different than the present" (p. 75). Long-term projections may serve to constrain legislative spending, encourage politicians to apply a longer time frame and, on occasion, provide a rationale and framework for legislative action. Such forecasts provide justification for increasing national savings in preparation for the aging of baby boomers. However, decisions about the structure of Social Security and health care programs are not highly dependent on information provided by long-term forecasts.
The Challenges: Economic and Budgetary Consequences
Several authors discuss the potential consequences of population aging in cataclysmic terms. Others approach the subject in more temperate terms.
Former Colorado Governor Richard Lamm asserts that increased life expectancies and declining fertility have combined to render New Deal programs for the old "demographically obsolete." As he sees it, barring radical change in health care and retirement income policies, the aging of the baby boom cohorts will bankrupt the young and divert resources from critical social needs. Wharton School economist Mark Pauly suggests that without major structural changes in Social Security and Medicare, future tax rates will be excessively high, imposing unacceptable burdens and distorting economic activity (p. 218).
Most sobering, economist Rudolph Penner, a former Congressional Budget Office (CBO) director and currently a senior fellow at the Urban Institute, warns of the potential for debt explosion and future economic collapse. As the federal deficit grows relative to the gross domestic product (GDP), eventually the federal debt will do so as well. Penner argues that this will lead to economic collapse, either because "productivity-enhancing investments" will be choked off as overall national savings decline, or, because, faced with declining revenues "the government tries to recapture resources through hyperinflation" (p. 130).
Writing in 2001, when the federal budget was in surplus, Penner was not sanguine about the ability of politicians to address projected problems by increasing taxes and/or cutting benefits, especially when the most difficult financing problems are perceived as being many years in the future. Penner observed, then, that the more favorable budgetary and economic outlook of early 1999, as compared to 1997, pushed out the implied date of economic collapse by roughly 30 years, from the 2030s to the 2060s. As a result, the "necessary change in tax and expenditure policy" implied in the 1999 CBO projections declined "to 0.6 percent of the GDP, about one-seventh of the change implied" in the 1997 projections (p. 130–131). Unfortunately, Penner's pessimism about the political process is not unfounded. In less than three years, the 10-year budgetary outlook has deteriorated dramatically.
Economists Jonathan Gruber's and David Wise's cross-national analysis presents the consequences of population aging in the United States in more moderate terms. Compared to other developed nations—especially France, Germany, Italy, Japan, and Spain—our financing problems are modest. Relative to these nations, the old-age support ratio in the United States—the number of persons 65 years and older to persons ages 20 to 64—is projected to increase more slowly during the next 45 years. Gruber and Wise analyze eleven developed nations—Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, Spain, Sweden, the United Kingdom, and the United States. U.S. male labor force participation at ages 60–64 and 65 and older is higher than all, excepting Japan (p. 45–46).
The United States generally provides less generous social benefits to elderly persons. The other nations in this study permit early retirement in their social insurance pension systems at earlier ages—age 60 in nine of the countries and 55 in Italy. More significantly, the pension benefit replacement rate for workers retiring at the earliest ages in their respective countries is higher in all but one nation—91% in France, 75% in Italy, and 62% in Germany, compared to 41% in the United States. Social spending on the elderly as a percentage of GDP was higher in all but three nations in 1995. It is projected to be higher in all but two in 2050, when average social spending among these nations is projected to be 11.4% of GDP compared to 7.8% for the United States.
Gruber and Wise are not suggesting that population aging is of little concern to the United States. To the contrary, here and elsewhere, their work implies that increased social spending associated with population aging will be "funded" by offsetting reductions in spending elsewhere, including spending directed at younger populations. But they do present a more manageable view of the challenge.
Economist Wendell Primus notes that total public and private spending on elderly populations—the total cost of what elders consume in any given year—provides a better measure of the economic "burden" of nonworking elderly populations than total federal or even total governmental spending on the elderly. Shifting the responsibility for meeting the needs of older populations from the public to the private sectors does not necessarily reduce the economic cost of supporting elders, unless this shift results in a relative growth in the number of working elders or reduces the consumption of the elderly without increasing the consumption of nonelderly persons. Primus is more optimistic about the ability of the economy to support a larger old population. But, he, too, is concerned with political risk. He questions whether politicians can avoid the temptation of spending the budget surplus on popular new initiatives, including tax cuts. Indeed, they could not!
Political scientist Joseph White takes a very different position than Lamm, Pauley and Penner. He raises important questions about the methods employed in long-range budgetary cost estimates as well as the political use of resultant forecasts. "Long-term budget estimates," White observes, "became a major factor in policy debate when the U.S. General Accounting Office (GAO), and then other agencies, began extrapolating current law to the point of total irresponsibility and then modeling the results" (p. 145). Moreover, as Aaron observes, long-range forecasts are necessarily unstable because small changes in underlying assumptions or initial circumstances can compound to dramatically alter projected outcomes. White is not arguing that long-range forecasting ought be disregarded, but that it ought to be more prudently applied and interpreted. For instance, responding to the debt explosion concerns raised by Penner and others, White observes, "Since the real problem is to avoid letting deficits get so large that they would feed on themselves, and the forecasts are uncertain, a responsible approach would be to have a budget policy at any given time, given available information, that does not threaten serious movement along the doomsday spiral within the next two decades" (p. 146).
White suggests that declarations of budgetary and entitlement crises, reinforced by reference to long-run projections and the need to "protect future generations," are often far more grounded in ideology than economics. The social construction of complexities surrounding population aging, rising health care costs, and budgetary policy as a crisis seem to provide justification for radical changes in Social Security, Medicare, and Medicaid. Casting Social Security and Medicare as the causes of a "unified entitlement crisis," instead of as programs that strengthen families and society, likewise, softens the policy "turf" for radical change.
White considers population aging as posing serious challenges to health and retirement income policies. In anticipation of these challenges he advocates cautious budgeting and addressing near term concerns. He would pursue more incremental changes, including retirement age increases, that would reduce the scope of the problem confronting future voters and policymakers. But concern for future generations does not require cutting the benefits of tomorrow's workers and retirees today based on projections of problems actualizing many years in the future. Instead, White argues that future generations will be better positioned to make choices, reflecting their values and more proximate understandings of economic constraints.
The Choices: Controversial and Consensual
The discussion of substantive policy options takes place at several levels. Lamm and Pauly argue for restructuring Social Security and Medicare away from social insurance and defined benefit principles. Theodore Marmor and Jerry Mashaw present the case for maintaining a universal approach to Social Security and Medicare, and Alicia Munnell lays out the case for defined benefit approaches. John Geanakoplos, Olivia Mitchell, and Stephen Zeldes clarify discussions of privatizing Social Security by distinguishing between private accounts, prefunding, and equity investment. Joseph Quinn's discussion on retirement and labor force participation trends includes a recommendation for incentives to encourage longer work lives. And chapters authored by Lynn Etheredge and Victor Fuchs call for more holistic approaches to reform.
Lamm asserts that it is morally imperative that expenditures on the old be limited. The old—13% of the population—receive 60% of federal social spending. Retirement commitments, he says, are unsustainable, and current generations are leaving a huge debt to their children and grandchildren (p. 200–201). He believes that pay-as-you financing is no longer an ethically defensible means of funding Social Security and Medicare. Today's demographics require advance funding and reduced commitments. He advocates broadening access to basic health care for the uninsured and underinsured by setting limits on available services for the old. It is unethical not to do so, Lamm asserts. This chapter is replete with assertions about affordability and morality, but falls short when it comes to discussing specific changes and the distributive implications of such changes within generations.
On the other hand, Pauly is very clear. For future retirees, he would phase in a means test for Medicare and shift toward defined contribution principles, allowing low-income people to receive a voucher or credit capable of purchasing coverage roughly equivalent to what is provided in today's traditional Medicare program. Scaled to income, the subsidy would not be available to the highest income beneficiaries, though they could purchase the coverage by paying the full premium. He views Social Security financing as less pressing, though he would phase in some reduction in real benefits for higher-income beneficiaries. Pauly recognizes the political risk that proponents of universalism such as Marmor and Mashaw note. However, Pauly counters that means testing (a.k.a. affluence testing) might reduce support among higher-income persons for Medicare and Social Security but suggests this will not happen if the benefits of the majority of beneficiaries are not affected.
Marmor and Mashaw argue that universal social insurance serves to strengthen and maintain a functioning political democracy and entrepreneurial capitalistic economy. In a dynamic, risk-based economy, workers need basic protections against recession, structural changes, and income losses due to disability, death, retirement, and health care. Social insurance programs soften the harsh edges of capitalism. As Marmor and Mashaw note, and Munnell later adds, social insurance also gives expression to and reinforces social solidarity, reducing risks of class conflict and political discord. The popularity of the social insurance approach is further enhanced by a public that considers these benefits to be an earned right based on work-related contributions. In contrast to Pauly, Marmor and Mashaw argue that means testing would undermine the political support for a system of social insurance that generally provides substantially larger rates of return to lower-income working persons. Moreover, means-testing Social Security and Medicare would penalize and ultimately discourage savings behavior.
Discussing the case for maintaining defined benefit programs, Munnell acknowledges that incorporating a defined contribution approach within Social Security (i.e., individual savings accounts) may strengthen consumer control and enhance self-reliance. But she rejects such a change because it would increase risks to individuals (especially the most vulnerable), make benefits less predictable, shift risks from government to individuals, be costly and difficult to administer, and undermine the redistributive elements of Social Security.
Geanakoplos, Mitchell, and Zeldes further clarify the privatization debate by carefully defining terms commonly employed. They distinguish between privatization, diversification, and prefunding of Social Security. Privatization involves a shift from the defined benefit approach that structures Social Security towards a defined contribution into individual accounts. Diversification concerns the broadening of Social Security investment options to include private equities and bonds, domestic and foreign. Diversification does not require privatization because, while it can be accomplished by individuals investing from privatized accounts, it can also be achieved by government investment of a portion of the trust funds in the private sector. Prefunding refers to moving away from pay-as-you-go principles towards a system with permanent assets that approximate future obligations. Similarly, prefunding does not require privatization; neither does it require diversified investments. Apparently, however, there are no free lunches here. For example, privatization with prefunding could trade-off the rate of return for early generations to the benefit of later generations. Privatization without prefunding would be neutral with regard to rates of return.
By disentangling privatization rhetoric and choices, Geanakoplos, Mitchell, and Zeldes make it clear that the "popular argument that Social Security privatization would provide higher returns for all current and future workers is misleading, because it ignores transition costs and differences across programs in the allocation of aggregate and household risk" (p. 286). Moreover, if higher rates of return are the goal, it is possible to capture higher rates through government investment of trust funds without privatizing Social Security and without centering the risk of diversification on individuals.
Criticisms of entitlement crisis claims as ideologically driven rhetoric, as well as support for the traditional social insurance approach, are also consistent with advancing modest reforms to address financing problems. Marmor and Mashaw, White, and others holding similar positions point out that reform is both possible and desirable. Modest reforms—such as increasing the length of the benefit computation period from 35 years to 38 years, extending Social Security coverage to all state and local workers, and diversification of trust fund investments—are consistent with the vision of those who would preserve Social Security as currently structured.
In terms of Medicare reform, Marmor and Mashaw do not shy away from giving consideration to payroll tax increases, greater use of general revenues, and expanded cost constraints on the medical industry. In addition to their arguments for maintaining the fundamental commitments of Social Security and Medicare, they conclude their chapter by advocating expansion of social insurance protections to "cushion modern citizens from the expected risks of postindustrial capitalism" and "the expected costs of modern medicine" (p. 195). More open to exploring defined contribution approaches within Medicare, Munnell frames the issue as a question of whether the potential advantages of a defined contribution premium support approach to restraining Medicare costs outweigh the potential costs to the sickest and lowest income beneficiary populations. Before acting, she suggests, though, that more compelling evidence is needed from the private sector experience with competitive approaches to organizing health care and restraining costs.
Quinn's chapter discusses changing retirement patterns. The century-long trend of early retirement of men ended in the mid-1980s (p. 294). Today's older workers are more likely to participate in part-time or short-term work or self-employment after leaving their principal jobs. Although general declines in unemployment from roughly 10% in 1983 to 5% in 1989 and 4% in 2000 certainly contribute to this turn-around, Quinn's analysis suggests that more is afoot. Norms and institutional incentives have changed, as well, in ways that can be expected to encourage later retirement expectations, delays in benefit acceptance, and later labor force withdrawal. These changes include: the virtual abolition of mandatory retirement, liberalizations of the Social Security earnings test and delayed retirement credit; rising health care costs; and reduced availability of employer retiree health benefit coverage. Similarly, the declining importance of defined benefit and increasing importance of defined contribution plans means that the employer-pension system now offers fewer incentives for early retirement. Further, a more functionally able and longer living older population is better positioned to work longer. Shifts from a manufacturing to a service-based economy provide employment opportunities that are less likely to be physically taxing, a change that is beneficial to older workers. Hence, Quinn's chapter creates a strong rationale for encouraging longer work lives as an important response—of individuals and of retirement and health care systems—to financial pressures associated with population aging.
As Quinn and many others in the volume suggest, initiating public and private policy changes that encourage later retirement certainly represents a potentially useful response to the growing pressures on public and private retirement and health care systems. But it will be important to implement such changes in a manner that protects older workers marginally employed, persons more likely to be low income and of minority status, and those that have fewer employment opportunities. Otherwise, the potential for a win-win policy response will be lost.
More Coordinated Approaches to Reform
Building on the previous chapters, Etheredge's chapter makes the case for a coordinated national retirement policy and Fuchs's for a more holistic approach.
Etheredge, whose background includes high-level involvement in health and retirement income policy issues at the Office of Management and Budget, advocates more coordinated change across public and private retirement income and health benefits systems. Policy changes in Social Security, Medicare, and related private mechanisms should work in tandem to encourage longer work lives and greater savings. The goal would be to "allow early retirement for those who cannot work" (p. 321), permit more flexibility when making personal decisions, and reward longer work lives. He would also expand opportunities for retirement savings, especially for the more than 50 million persons not covered by employer pension plans. Etheredge sees a more rationalized retirement system as providing more flexible options for retirees, options that could fill some of the gaps in long-term care and health protections. For example, he suggests a policy change requiring federally qualified employer pension plans to provide their retirees with a payout option of rolling over some of their pension assets to pay for private long-term care insurance. He would also exempt people who purchase private long-term care benefits from the Medicaid nursing home care spend-down requirements. Importantly, as an alternative to reducing universal Social Security protections, Etheredge suggests giving greater scrutiny to the $90 billion in annual taxpayer subsidies to private pensions.
Fuchs cautions against examining programs one at a time. He urges a holistic perspective that would focus upon and make explicit: publicly and privately financed expenditures on the old; and expenditures financed by older persons, themselves, and those funded through by transfers from younger age groups. Health care expenditures represent a high proportion of the consumption of today's old, and "elderly persons are much more dependent on transfers for health care expenditures than for other goods and services" (p. 382). Absent offsetting changes, Fuchs suggests that if health care expenditures on the old "grow 2 to 3 percent per annum more rapidly than expenditures on other goods and services, the burden on the young is likely to be unbearable," and more elderly persons are likely to be "health care poor" (p. 385). To address these concerns, Fuchs proposes some form of mandatory private retirement savings and incentives for encouraging longer work lives.
The Politics of Reform
In their chapters, political scientists Norman Ornstein and Robert Binstock take on the formidable task of assessing the politics and political feasibility of enacting retirement income and health security reforms.
The structure of the nation's political institutions and the contemporary polarization of congressional politics pose formidable barriers to reform. Ornstein notes that the growth in the number of "safe seats" results in lawmakers being more concerned with primary elections than general elections and, consequently, most responsive to their party's activists who tend to be more ideologically driven and dominate primary politics. Both parties try to gain political advantage over the other on key issues, with Social Security and Medicare being high on the list. Slim Congressional majorities and polarization result in less willingness to compromise. Budgetary and tax politics adds to what Ornstein refers to as this "witch's brew of contentiousness" (p. 339). Binstock adds that comprehensive reform is generally difficult to accomplish within the American political system. Political power is fragmented, and, as both he and Ornstein imply, the institutional structure of the House and the Senate makes it much easier to block than advance legislative change. Large-scale change generally requires immediate crisis. Absent a short-term crisis, there is little incentive for politicians to take potentially politically costly positions for problems expected to actualize some 20, 40, or even 60 years hence.
Ornstein suggests that, in addition to coming up with reasoned and understandable proposals for reform, a major crisis or restoration of some level of cross-party political trust is prerequisite to comprehensively addressing problems associated with population aging. Binstock suggests that the problems of sustaining Social Security and Medicare need to be marketed as crises for individuals and their families rather than crises for Social Security and Medicare. "The key," he suggests, "would be to convey the costs of policy inaction in terms of what it would mean tomorrow for older people, the nature of family obligations and lifestyles, and the fabric of familiar social institutions that are integral to daily life" (p. 370). By painting scenarios of future crises for individuals and families, it may be possible to convey a sense of urgency and shift issues related to the aging of the baby boom into a more central position on the nation's policy agenda.
Concluding Comments
Policies for An Aging Society does a fine job of presenting many of the economic and political issues associated with health and retirement income security. Unanimity, with regard to problem formulation, policy options, and preferred courses of action is not to be found within its pages; neither is it a goal of its editors. Differing views are present and generally well stated. Importantly, the editors recognize that values play an important role in framing problems and policy choices associated with population aging. But the book, while certainly worthwhile, falls short in three important respects.
Population aging is interacting with another dramatic social trend—the increasing racial and ethnic diversity of the United States (Torres-Gil & Moga, 2001). The older population will be more diverse than it is today; the younger population even more so. By 2050 about half of the U.S. population will consist of non-White and Hispanic groups, compared to 28% today (Himes, 2001). This trend is hardly acknowledged in this book, and important related policy questions are not addressed in any depth. For instance, there is little discussion of how retirement income and health security policy options may have differential effects across race and ethnic groups. Similarly, class and gender differences are rarely addressed.
Policies for An Aging Society also does not acknowledge caregiving as a central policy concern in an aging society. Yet, as is commonly acknowledged, family members, usually women, provide 80% of the community-based care of the functionally disabled elderly population, often at great emotional, financial, and social cost. Given the centrality of the family as an instrument of social protection, it seems odd that a book entitled Policies for An Aging Society would neither acknowledge nor address the policy choices for strengthening the institution of family care and the capacity of its members to provide such care.
As mentioned, the contributors to this book—primarily economists and a few political scientists—are leading national experts, many of them deservedly acknowledged as eminent. Reading through its pages, it is tempting to wonder how greater representation of other disciplines (e.g., history, philosophy, sociology) and professions (medicine, nursing, and social work) might have made for a broader and more robust treatment of policy issues associated with an aging society.
This said, Policies for An Aging Society is a good book and an excellent resource.
References
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