Bad Choices

The USA is in now in year three of what will prove to be a twenty-year mega-trend of an aging population

by Bruce Krasting

If two people are dying from liver disease, one 25, the other 65, and there’s only one liver available for transplant, the old one dies.

There’s one economic variable that’s highly predictable; demographics. In all of the industrial countries the aging population is now weighing on the economic outcome. Japan was the first country to go down the tubes from this phenomenon. Europe is behind Japan, but rapidly catching up.

The US has a huge headache with an aging population. The number of oldsters is big, and rapidly rising. Add to the size of the aging US population the fact that the promises made to these people are enormous. Other countries, like Canada, Russia and even China are struggling with the problem.

The USA is in now in year three of what will prove to be a twenty-year mega-trend of an aging population. These facts have been known for a long time, I’m amazed that the US has been so slow to come to grips with the implications of what is clearly in our future. Thanks to the Fiscal Cliff debate, the financial implications of the graying of America are now being discussed, and Washington is talking about “solutions”.

So what are the solutions that the deciders are zeroing in on? Simple. The proposals (and what we will get) are extensions of the ages that benefits become available. Both sides have suggested that pushing out the age for Medicare and Social Security benefits for an additional two years is appropriate. The Administration has said it would be willing to do this; John Boehner (and other big Republicans) has flat-out insisted that it happen.

At some point in the next year (I don’t think this will be part of the fiscal cliff resolution) the eligibility changes will take place. The changes will be phased in over 10-15 years. When the ink is dry on the new laws, the bean counters in Washington will declare success. The end result will be a 3-4 year extension of the lives of both the Social Security and Medicare Trust Funds.

Where does this “fix” take the country? That’s easy to forecast. Older people will be forced to stay in the workforce for years longer. The retirement age will be pushed out, the benefit checks will also be smaller on a relative basis.(There will be cuts to inflation adjustments) Once again, the deep thinkers in D.C. are “okay” with making old folks wait for a few years for benefits; the thinking is that people live longer, so make them work longer.

My fear is that the solution to one problem is going to spill over and aggravate another problem. The fix on retirement benefits will cause a long-term erosion of youth unemployment. That outcome could prove more devastating than the aging problem.

Its not hard to find evidence that these big trends are already moving the needle. Last Friday’s NFP is a case in point. Zero Hedge has the details (Link) and (Link). This chart shows what happened in November. A disaster for those 22-54, the 55-69 group were the winners. 

It wasn’t just November. Consider the changes since 2009.

What does a government do when it is faced with high youth unemployment? It sends them to school with borrowed money. This won’t work much longer: 

This is the worst kind of whack-a-mole problem solving. Washington will take steps to address the fiscal consequences of the aging population, but those steps will create a multi-decade drag on what is already a serious problem.

We are far from the point where rules on transplants should apply to choices on economic policy, but we’re getting closer. The policy choices that are being made today are running counter to the rules on transplants. They favor old over young. We are a long way from being balanced on this issue; longer still toward policies that actually tip the scales to the next few generations.

If you asked the question, “How do we create opportunities for younger workers?” The answer would be to lower the retirement age. Create the opportunity for upward mobility. We are on a path 180 degrees in the opposite direction.

I don’t see a way around this. Demographic changes are powerful forces. The problem is we are on the third rung of a twenty-foot steep ladder, and we’re already making bad choices.