The Aging Couple

By Melinda Beeuwkes Buntin and Susann Rohwedder

Melinda Beeuwkes Buntin is associate director of the Economics, Finance, and Organization Program within RAND Health. Susann Rohwedder is a RAND economist specializing in the economics of aging.

On New Year’s Day this year, 62-year-old Kathleen Casey-Kirschling became the first baby boomer to cash a Social Security check. Seventy-eight million members of her generation will soon follow, threatening the long-term viability of Social Security. But the greater challenge comes in three years when the baby boomers start becoming eligible for Medicare.

The plight of the Social Security trust fund is well known. Outflows are projected to exceed inflows beginning in 2017; without corrective action, the trust fund will be depleted by 2041. But the Medicare trust fund is in worse shape: Outflows will begin to exceed inflows this year, and projections indicate that it will be exhausted by 2019 (see the figure).

More worrisome still, these projections may actually understate the extent of Medicare’s funding problems. Health care costs have historically grown faster and less predictably than general inflation. This means that the Medicare trust fund could expire even sooner than most economists are projecting and that modest adjustments to taxes or benefits won’t bring the fund into balance.

What has brought on this double-barreled funding crisis? Two factors stand out. First, Americans are living longer. Men reaching retirement at age 65 today typically look forward to a further 17 years of retirement, compared with fewer than 13 years back in 1965. The result is that retirees are receiving Social Security and Medicare benefits for far longer than the designers of the program ever envisioned. But more important, the cost of health care has increased rapidly, thanks largely to the pace of technological innovation.

Outflows Are Projected to Exceed Inflows for Medicare in 2008; for Social Security, in 2017

SOURCE: Status of the Social Security and Medicare Programs: A Summary of the 2008 Annual Reports, Baltimore, Md.: Social Security Administration, revised April 22, 2008, Chart C. Social Security Online NOTE: Data are historical through 2007 and estimated for years thereafter.

Social Security and Medicare’s looming budget shortfalls pose real problems. But any problem caused by longer lives and medical breakthroughs must be approached cautiously. Social Security and Medicare’s financial problems are real, but so are their achievements: historic reductions in poverty among seniors, greater longevity, and the provision of cutting-edge medical technology to seniors. The challenge for policymakers is to address the two programs’ financial problems while building on these gains.

Successful reforms will reflect this central insight: Social Security and Medicare have reinforced each other’s benefits and now suffer from intertwined problems. Reforms to one must, at the very least, take into account effects on the other. For example, raising the Social Security early retirement age would result in people working longer and paying more into both Medicare and Social Security, even if the age of eligibility for Medicare was not changed. At the same time, allowing Medicare, rather than employer-sponsored health insurance, to be the default source of coverage for those over age 65 could reinforce such a policy by reducing the cost of employing older workers and expanding their job opportunities. On the flip side, allowing people to buy into Medicare early could encourage earlier retirements.

Social Security and Medicare are like an aging boomer couple: The sooner they start planning and saving for retirement, the better off they’ll be. But early action alone isn’t enough. Like any successful couple, each program needs to make its plans with the other in mind.