Friday, December 28, 2012

Hope I Die Before I Get Old

            It has been almost 50 years since Peter Townsend wrote those famous words to the rock song, My Generation.  Over that time, the baby boom generation to which he was referring, got old.  What is more, if government policies regarding the elderly, a group I joined on November 20, 2012, don’t change promptly younger generations may be singing “I hope they die before I go broke.”      

            To appreciate the problem, imagine a thought experiment in which a miraculous genetic breakthrough instantaneously increases the healthy life span to 200 years but retirement still occurs at 65.  Such a breakthrough would produce widespread poverty because the small fraction of working people would have to fund 135-year retirements.  Income per capita eventually would fall by more than half as the non-working population was swamped by the unproductive majority.

            Of course, the actual increase in life expectancy is much less dramatic than the thought experiment.  It has also occurred more slowly over time.  The slow, but consistent, improvement has led policy makers to behave somewhat like the frog in the stove pot when the heat is slowly turned up.  Whereas the frog would immediately jump out if dumped into a boiling pot, if the temperature rises slowly the frog is cooked.         

            Social Security is an example of what is cooking now.  The Social Security Act was signed in August 1935.  At that time, the average life expectancy of Americans was 61 years and approximately 6% of the population was over 65.  By the end of 2012, average life expectancy had risen to 79 years and the percentage of the population over 65 had more than doubled to 15%.  Even more dramatic has been the decline in the number of active private sector employees per social security recipient.  In 1965, when Peter Townsend penned his famous words, there were 4.9 workers for every recipient.  By 2011, the ratio was down to 1.75 and was projected to fall further.  

            A solution both in the case of the thought experiment and with respect to our actual social security system is to recognize that the healthy elderly can be a great resource, not just a burden to society.  Machines now do much of the physical labor that characterized jobs in 1935.  Today computers can also offset the impact of the declines in mental quickness and rapid recall that occur with age.  As such, they increase the value of wisdom that accumulates with maturity.  With the right incentives and proper policies, taking advantage of all the human capital possessed by the elderly population could produce an economic boom.  But it will take time for people to adjust, so we need to start reforming the system now.

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