Provide, provide: the economics of aging

Most older persons face two potentially serious economic problems: (a) declining earning power and (b) declining health that can be partly offset by increased utilization of health care. The decline in earning power is largely attributable to physiological changes and to obsolescence of skills and knowledge. These adverse effects are exacerbated by public and private policies that reduce the incentives of older persons to continue work and increase the cost to employers of employing older workers. The problems of earnings replacement and health care payment are usually discussed separately, but there are several reasons why they should be considered together. First, there are often tradeoffs between the two. Money is money, and for most people there is never enough to go around. This is self-evident where private funds are concerned. Low-income elderly, for instance, frequently must choose between expensive prescription drugs and an adequate diet. For middle-income elderly, the choice may be between saving on medigap insurance or forgoing an airplane trip to a grandchild's graduation. Difficult choices are also inherent in the allocation of public funds. The same tax receipts that could be used to maintain or increase retirement benefits could be used to fund additional care, and vice versa. In discussing these tradeoffs, some analysts assert that people will gladly give up other goods and services for medical care that cures illness, relieves pain, or restores function. Others believe that some people would forgo some health insurance in order to maintain access to other goods and services. A second reason for looking at the two problems together is that they pose similar questions for public policy. How much should each generation provide for its own needs in old age, and how much should be provided by the generations that follow? How much provision should be voluntary, how much compulsory? How much intra-generational redistribution is appropriate after age 65? How well can private markets serve the elderly's desire for annuities and health insurance, and when are public programs more efficient? Finally, the problem of health care payment is approaching that of earning replacement in economic importance and, by 2020, will far exceed it. Declining health after age 65 results in substantial increase in use of prescription drugs, hospital admissions, repair or replacement of parts of the body, rehabilitation and physical therapy, and assistance with activities of daily living. New technologies offer great promise for offsetting the health problems of aging, but often at considerable expense. Overall, per capita expenditures for health care after age 65 are between three and four times as great as for those under 65. This presentation will focus primarily on the (thus far) inexorable increase in consumption of health care by older Americans. If this increase continues and if the government's share of the total remains unchanged, the tax burden on younger cohorts could become intolerable. Concomitantly, if the private share remains unchanged, the ability of the elderly to obtain other goods and services would be sharply diminished. Although the emphasis of the session will be on aggregate and average results, levels and trends in income inequality among the elderly will also be examined and compared with inequality at younger ages. The session will conclude with a discussion of changes that might avert the economic and social crises foreshadowed in the data.