It's Not Just Social Security
It is a paradox whose implications perhaps only an economist can fully appreciate: Older Americans are leading ever longer and healthier lives, and costs of many treatments for illness are falling. Yet health-care outlays for the elderly continue to rise far faster than economic growth--at a pace that promises over the next few decades to eat into the living standards of many seniors and to sharpen tensions between retirees and younger workers, whose taxes help cover their medical bills.
"Although people justifiably worry about Social Security," says Victor R. Fuchs of Stanford University, "paying for old folks' health care is the real 800-pound gorilla facing the economy."
In a new study, Fuchs assesses the problems that lie ahead. Based on recent health-spending growth trends and Census Bureau projections--that the 65-and-older crowd will expand from 13% of the population today to 16.5% by 2020--he estimates that the share of gross domestic product devoted to health care for the elderly could double by 2020, to around 10%.
Even if other medical spending stays at around 10% of GDP, that implies that the nation's total health-care bill would rise from 14% of GDP in 1996 to about 20% by 2020. By contrast, in almost all major industrial nations except the U.S., total health spending for everybody still amounts to no more than 10% of GDP--and usually less. And in many of these nations, the elderly already represent 16% of the population.
Indeed, Fuchs notes that it's not mainly the growth in senior ranks or in longevity that explains his projections, but the rise in oldsters' medical bills, up at nearly a 4% real annual pace over the past decade. At that rate, he estimates that health-care spending per senior will soar from $9,200 in 1995 to almost $25,000 (in 1995 dollars) in 2020--a hike that would strain the resources of both the government and seniors themselves, who on average shoulder over a third of their own health bills.
Seniors are spending more on health care because of the spectacular success of new medical technology and drugs, which often enhance the quality of people's lives even if they have little effect on mortality. As prices of new treatments come down, they become more widely used, adding to total spending. Meanwhile, pricey technological advances move through the pipeline. "It's an unrelenting process," says Fuchs.
It's also ultimately unsustainable. Other countries, notes Fuchs, slow the pace of technological change and diffusion by setting limits on funding and on eligibility for procedures. Such methods, he believes, are probably unsuited for America's individualistic society.
A more likely tack, he says, is to raise incentives for people to save and keep working in later years so that they can pay more of their medical bills. Another idea might be a tax-financed program to provide all Americans with vouchers to buy basic coverage that they could add to if they wanted to avail themselves of new, costly treatments.
"One way or another," says economist Fuchs, "America will have to tame the health-care gorilla."