The Economics Of Aging

Grow old along with me!

The best is yet to be,

The last of life

for which the first was made.

--Robert Browning, 1864

A mericans are getting older.

The Woodstock generation, the roughly 76 million baby boomers who were born from 1946 to 1964, is going gray. The elderly are living longer. And Americans seem gripped with foreboding about aging. Growing old means years wasting away in nursing homes, debilitated by chronic illness--as Shakespeare writes, "sans teeth, sans eyes, sans taste, sans everything."

The visions grow darker on fears that spendthrift Americans aren't saving enough and that when they retire, their living standards will plunge. Social Security payments may not be there to help out as the system buckles with too few workers supporting too many retirees. And the swelling ranks of the elderly will send medical costs spiraling out of control until "we will have to limit health care for the elderly," says Daniel Callahan, director of the Hastings Center for bioethical research. Little wonder that intergenerational animosity has become a staple on talk radio. These days, the mantra "we can't afford it" echoes from Senate hearing rooms to corporate boardrooms. Altogether, the worst is yet to be.

But there are strong reasons to believe that the age apocalypse won't arrive. Like your grandfather's Oldsmobile, the image of an America debilitated by age belongs to a different economy and an earlier generation. Instead, a series of broad, mutually reinforcing changes in the U.S. economy will make an aging population much more of an economic asset than before.

FIT FOR LIFE. One striking transformation is how companies now use information technologies to raise productivity. And higher productivity, the fundamental source of economic wealth, makes it easier to fund the Social Security and health-care bills that are squeezing America's wallet today. Another change is that people can be more productive far longer in an information-and-services economy than one dominated by factories and heavy industry. Healthier lifestyles and medical advances should also postpone disability among the elderly. Says Dr. Sanford Finkel, director of the Buehler Center on Aging at Northwestern University: "People who used to be considered old at 65 are usually still in their prime at that age today."

Boomers are also better off than their parents. Their real median household income and wealth is higher than their parents' at comparable ages. Billions of dollars are pouring into retirement savings plans and mutual funds as boomers reach those sober ages when savings typically rise. "Those who say it is going to be awful don't understand that boomers have multiple sources of income and multiple retirement packages for husbands and wives," says Charles Longino, demographer-gerontologist at Wake Forest University.

Certainly, the numbers heading for Golden Pond are staggering. Today, about 1 in 8 Americans is 65 years or older, compared with 1 in 25 at the turn of the century. By 2030, 1 in 5 Americans will be elderly. And senior citizens are around for a lot longer. Life expectancy at birth was 47 years in 1900; in 1993, it reached 76 years. For those reaching age 65, average life expectancy for men is projected to rise from a current 81 years to 85 in 2040; for women, it's 85 and 88. The fastest-growing segment of the population is the so-called oldest old--those 85 years or more.

To be sure, not all these senior citizens will be physically and financially healthy in retirement. Especially vulnerable are less educated workers, who have had their incomes hammered by global competition and high-tech investment. Also at risk are the growing ranks of single-parent households, typically headed by a woman. Both groups are far less likely to have a pension plan and own their home. Indeed, while some twentysomething activist groups, rebelling against costly federal benefit programs for the elderly, gear up for a generational showdown, the economy's real fault line is not the generation gap but the growing split between rich and poor. And Washington's faltering drive for overhauling the health-care system raises concern for prospects of bringing medical inflation under long-term control.

NEW ORDER. Nevertheless, the positive forces at work are powerful. Among them is a stronger economy. Thanks largely to the information revolution, the U.S. economy can ramp up output without triggering an inflationary surge. Companies are spending huge sums on computers, software, and telecommunications gear--the foundations of the information economy. Real business expenditures on all forms of information technology have soared by nearly 70% over the past three years, says Stephen S. Roach, economist at Morgan Stanley & Co. The result: greater efficiency and lower prices. Over the past two years, gross domestic product per worker has risen at a 1.5% annual pace. And consumer inflation is running at a tepid 2.8% yearly rate.

Strong growth takes care of a lot of problems by raising living standards. In a self-reinforcing cycle, higher productivity boosts real incomes and corporate profits, stimulating investment and savings, and so forth. For example, with long-term productivity expanding at a 1.5% annual rate, gross domestic product per elderly person in 1987 dollars rises from $158,000 in 1993 to $194,000 in 2010 and to $207,600 in 2050. By contrast, at the 0.75% annual rate that holds for part of the 1970s and 1980s, GDP per senior citizen is 12% lower in 2010 and 35% less in 2050. Says Richard Suzman, chief of demography at the National Institute on Aging: "The growth rate of the economy is a far more important variable than the simple age of the population." And high growth rates in the U.S. do more to ease any burdens from an aging population compared with other major industrial nations, such as Germany and Japan, because their populations are aging even faster than that of the U.S., and their economies are less flexible.

Workplace changes are part of the demographic transformation, too. People will be working longer, and older people will contribute more to economic growth. Clearly, the information economy will ease the transition to longer working lives. Working with computers in service-sector occupations such as financial services and medical diagnostics is much less demanding physically than manning an auto assembly line or mining for coal. Says Maria C. Robotham, manager of health care and aging studies at the Futures Group Inc., a consulting firm: "We are also finding more interest in second and third careers. A lot of retired people are returning to start a new career."

Of course, some people will find the shift to longer work lives traumatic. The median retirement age declined from age 67 to 63 from 1950-55 to 1985-90. Yet it's unrealistic for people to expect to spend almost a third of their lives in retirement. Already, the Social Security retirement age for full benefits is slated to increase to 67 in 2022, vs. the current 65. And an aging workforce will compel companies to rethink virtually every aspect of how they organize business in order to tap into the knowledge of their older workers while keeping promotion opportunities open for younger employees. The payoff will be huge, though. "Just as the economy was blind to the potential of women and work," says Betty Friedan, author of The Feminine Mystique in 1963 and The Fountain of Age in 1993, "the idea that people over 50 are somehow on their way to senility is blindness to the potential of the last third of life."

PAYCHECK PEAK. Just ask Carl G. Rowan, 85. After owning and operating Gamer's Confectionery, a restaurant in Butte, Mont., for 51 years, Rowan sold the business in April, 1993. Everyone expected Rowan to settle into a comfortable retirement, but then Kent Parsons, manager of the local Wal-Mart, offered Rowan a job as a Wal-Mart store greeter. Rowan now works 30 hours a week, makes $5.45 an hour, and takes $50 out of each paycheck to buy Wal-Mart Stores Inc. stock through an employee stock purchase plan--and Wal-Mart matches 15% of his contribution. "It's exciting. I said [when I sold Gamer's] that this is not the end of Carl Rowan, it's the beginning." Parsons wants to have a staff whose age averages 40. "It makes for a more stable workforce, a more consistent workforce," he says.

Still, many economists and financial planners believe the American dream is withering away. For years, they say, Americans have consumed like mad, living beyond their means, eager to whip out credit cards to buy the latest fashion or gadget. The personal savings rate has fallen from an average of some 7% in the 1960s through 1980s to the 4.5% range in the 1990s. The Merrill Lynch Baby Boom Retirement Index estimates that baby-boom households save at just one-third the rate needed to provide them with a secure retirement at age 65. "We think there's a very large problem, and it's going to get worse," says John L. Steffens, executive vice-president for Private Client at Merrill Lynch & Co.

Yet the personal savings rate understates the country's financial well-being. Boomers are entering their peak income years, when people traditionally begin to save more. "We are at a secular and cyclical low in the personal savings rate, and we should see it rise throughout the rest of the decade," says Mark M. Zandi, economist at Regional Financial Associates Inc. "Ten years from now, we'll look back and say `Wow!--did demographics have an impact on savings."'

VESTED INTERESTS. Boomers already stack up surprisingly well compared with their parents. The average baby boomer had a real 57% aftertax income advantage over his or her parents, after adjusting for variations in household size and composition, calculate economists Richard A. Easterlin of the University of Southern California, Diane J. Macunovich of Williams College, and Christine M. Schaeffer, sociologist at USC. Key to the boomers' strong material gains are women working and smaller families. "The baby boomers have been able to achieve material economic gains, on average, through a lot of family sacrifices," says Easterlin.

But will retirees be able to maintain their preretirement living standards rather than simply do better than their parents financially? Here the evidence is more controversial. To some, the answer hinges on whether retirees are willing to sell their homes to help fund retirement living. For instance, the Merrill Lynch calculation--that boomers are saving at only one-third the rate necessary to maintain their level of consumption in retirement--discounts the home as a form of savings. The reason: Today's senior citizens are often reluctant to sell their homes, preferring to remain in their communities. Yet when Merrill takes housing wealth into account, boomers are saving at a full 84% of the rate needed to maintain current living standards, according to the Employee Benefits Research Institute.

The pension outlook is also raising concerns. In the 1980s, the era of leveraged buyouts and merger mania, companies cut back on their traditional, defined-benefit plans--a fixed payout based on a salary and years-of-service formula. Companies increasingly turned toward savings programs such as 401(k) plans--in which employees choose the investment option and bear all the investment risk. Young people in particular may not be taking sufficient advantage of these retirement savings plans. And with workers making their own investment decisions, poor or too conservative choices could lower retirement living standards.

Once again, the signs are improving. Both pension sponsorship and participation rates declined for a time in the 1980s. Yet since 1988, the proportion of workers vested in a pension plan, participation rates among workers, and the total number of workers employed where a plan was sponsored have all risen, according to the Employee Benefits Research Institute. In addition, the 56,651 net decrease in defined-benefit plans from 1985 to 1990 has been more than offset by a 149,078 net increase in defined-contribution plans--some of them at smaller companies that probably wouldn't have offered a retirement plan in the past. Even young people may be better off. Younger workers change jobs frequently and many fail to become vested in a traditional defined-benefit plan. By contrast, money that's put aside in a defined-contribution plan is "portable," and retirement savings can continue to grow even after switching employers.

WINDFALLS. And retirement savings are increasing. Contributions to 401(k) savings plans now total about $490 billion and could top $1 trillion by early 1999, according to Access Research,

a consulting firm in Windsor, Conn. Easily funded through payroll deduction, 401(k) participation rates average 74% of those eligible. Contributions are often partially matched by employers, with more than half offering a 50% match. Although there is fierce disagreement among academics, economists such as James Poterba of Massachusetts Institute of Technology, Steven F. Venti of Dartmouth College, and David Wise of the Hoover Institution believe these tax-advantaged contributions are not reducing savings elsewhere. "Our work suggests that future generations of retirees will have saved more than previous retirees," says Venti.

Indeed, an aging population is putting more money in long-term financial assets in the hope of earning higher returns. The share of household financial assets now held directly and indirectly in stocks and bonds is at 75%, the highest level since 1961, according to Donald P. Morgan, a senior economist at the Federal Reserve Bank of Kansas City. "Walk into any large bookstore in America and look at the personal finance section. They're not just for rich folks anymore, as most big publishing houses add 10 to 20 titles a year in this area," says Neal Cutler, director of the Boettner Institute for Financial Gerontology at the University of Pennsylvania.

Even the elderly often save well into their 80s, say economists. Take Francis Johnston, 81, of New Hope, a suburb of Minneapolis. Johnston, who retired in 1982 as a linotype operator for a religious publishing company, saves about $10,000 a year. The way he saves is to avoid spending the interest on his CDs and bonds. At the end of every year, whatever amount of money is left over from pension or Social Security checks is put into a CD or annuity.

Bequests are expected to boost savings in coming decades. Boomers will inherit some $10.4 trillion from 1990 to 2040--for a mean inheritance of some $90,000, according to Robert B. Avery and Michael S. Rendall, professors of consumer economics and housing at Cornell University. Take Laura Weston, a 36-year-old stage manager for the Sacramento Theatre Co. She inherited "quite a bit of money"--something over $100,000. Today, she's building her savings by contributing to an individual retirement account, investing in equity mutual funds, and touching her inheritance as little as possible.

COUNTERBALANCES. Of course, not everyone is able to put money aside or will be better off in retirement. Inheritances are highly skewed toward the wealthy. Many families will feel squeezed between paying for their children's education and caring for elderly parents. More disturbing, median incomes of households headed by someone aged 25 to 34 with less than a high school diploma fell by 12% from 1962 to 1989. These same households have little wealth, too. "There is a group of people living close to the edge, from paycheck to paycheck," says Diane Swonk, economist at First Chicago Corp.

Social Security will alleviate some of the economic pressure on those with fewer resources to draw upon in retirement. In 1994, Social Security replaced about 42.5% of average earnings of those who retired at age 65, but for low-wage recipients the replacement ratio was about 57.5%. Under the Social Security Administration's midrange assumptions, similar replacement ratios are likely to hold for baby boomers who retire in 2030 at the then normal retirement age of 67.

True, trouble looms in 2013. That's when the Social Security system will begin paying out more in benefits than it receives in tax revenue. Although it may be political dynamite to tamper with Social Security, a number of economists agree that Social Security's financing problems are manageable with a combination of phased-in tax increases and benefit cuts, such as making cost-of-living adjustments less generous and raising the retirement age to 69 or even 70 years old. "You don't have to do anything draconian," says Bruce D. Schobel, a vice-president at New York Life Insurance Co. and staff actuary on the 1983 Greenspan Social Security Commission. And higher productivity will also ease pressure on the Social Security system.

Today's huge immigrant wave will also help meet those Social Security checks. More than 1 million newcomers a year have arrived in this country in the past decade. Immigrants tend to be in the prime of their working lives with decades of taxpaying work ahead of them. "An influx of immigrants keeps the labor force younger, and that is an important offset to the aging effect," says Edward Woolf, economist at New York University.

At the same time, advances in medical technology--from beta blockers

reducing hypertension to hip replacements--are making it easier for the elderly to live active lives. Americans are smoking less, exercising more, and are better educated than their parents. Says Dennis W. Jahnigen, director for the Center on Aging at the University of Colorado Health Sciences Center: "The economic impacts of living better lives are very positive--as opposed to 20 years ago when people had stroke after stroke before they died." Adds Maria Robotham of the Futures Group: "There are changes in behavior patterns that could keep people productive longer in economic terms."

Yet in the country with the biggest medical tab in the industrial world, won't the elderly send health-care inflation into the stratosphere? The elderly now consume more than a third of all health care in the U.S., and an aging population suggests that proportion will grow over time--old folks need more medical care. Says Richard D. Lamm, former governor of Colorado and now director of the Center for Public Policy & Contemporary Issues at the University of Denver: "What do you do with an 87-year-old with Alzheimer's who needs a hip replacement?"

TICKTOCK. There are no easy answers. Physical afflictions, such as hearing loss and frailty, increase with the ticking clock of age. And as more people move into their 80s and beyond, mind-robbing diseases such as Alzheimer's mean more expensive nursing-home care. But that isn't the same as saying an aging population is the driving force behind health-care inflation or that rationing health care to the elderly is the only way to contain costs.

For instance, many analysts believe the U.S. spends far too much on expensive and largely futile medical treatments on the aged. Yet in 1988, the amount that might have been saved by reducing the use of aggressive life-sustaining interventions and care for dying patients of all ages was 3.3% of total health-care expenditures and 6.1% of Medicare costs, estimate Dr. Ezekiel J. Emmanuel, assistant professor at the Harvard Medical School and Linda L. Emmanuel, assistant director of the school's medical ethics unit. In other words, out of that year's $546 billion medical bill, the cost savings would have amounted to only $18.1 billion and $5.4 billion, respectively. "Health-care costs are growing out of control, and the aged are high-end users of medical care, but to say that the increase in costs is attributed to aging is wrong," says Daniel Mendelson, researcher at the health-care consulting firm Lewin-VHI.

Indeed, the primary force pushing health costs ever higher in the U.S. is technology, not demographics. And most of the growth in health-care spending resulting from scientific and technological medical advances are applied to the general population, not just the elderly, says Dr. William Schwartz, professor of medicine at the University of Southern


Instead of a burden, senior citizens may indeed be tomorrow's economic bonanza. Certainly, financial services of all kinds, from mutual funds to estate planning, is a growth market. The senior citizen market is more than canes, "Pampers and nursing homes," says

Eric Pfeiffer, director of the Suncoast Gerontology Center at the University of South Florida Health Sciences Center. "The elderly are still an untapped market in housing, clothing, tours, and investment advice," he adds.

Until recently, a nursing home was one of the few alternatives for those who were finding it difficult to manage their own households. In the past decade, however, "assisted" living centers for those who need some help have been gaining in popularity. At the moment, many are quite expensive, although competition should bring prices down over time. The Heritage Club in Denver has both independent apartments and assisted living, and some of the homes also have nursing facilities. Jean A. Carson, 88, moved into her two-bedroom apartment three years ago. She fixes her own breakfast and lunch but eats dinner in the dining room downstairs. She works to stay healthy at exercise class and in the weight room. "I'm better than I was 10 years ago. I've got muscles and joints I haven't used for years that are working again," she says.

HELPING HANDS. Colleges see senior citizens as a market opportunity, too. The Academy of Senior Professionals at Eckerd College (ASPEC) in St. Petersburg, Fla., brings retired professionals together with Eckerd's undergraduate student body as teachers and participants in classes. "It's very important for older people to pass on values and experiences in the hope these things will be helpful to tomorrow's leaders," says Arthur L. Peterson, director of the program.

The age wave is sure to bring about plenty of upheaval. The aging of America isn't a story about the imminent, or even distant, arrival of utopia. But there are many positive fundamental forces at work. The nation is more productive than at any time since the 1960s. The elderly are more vital than before. Americans can afford to grow old. And they will grow old gracefully.

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