A few years ago, I ran into an old high school classmate at a Sunday farmer’s market. We were in our mid-50s at the time and he excitedly told me that he was retiring from his teaching job, adding that 30 years was long enough to work and it was time to retire.
That chance encounter with an old friend is a harbinger of very challenging times ahead for the country. As the baby boomers age, they are leaving the workforce in unprecedented numbers, with life expectancies that are longer than ever, generating enormous unfunded expectations for future income. We have not set aside nearly enough money to work for 35 years and retire for 40, at 80 percent of our highest working wage.
The underpinnings of today’s unfunded pension liabilities have their roots in a social bargain struck decades ago which assumed that a portion of an aging generation’s retirement income would come from the productivity of their kids. The math was easier when the baby boomers were all in the workforce, providing a sizeable denominator over which to divide the unfunded portion of their parents’ and grandparents’ retirement benefits. That math becomes more difficult as the baby boomers age into retirement. It’s not clear if our kids would have agreed to the bargain had we asked them.
The same line of thinking that led to the unfunded pension problem – based on a 1950s population pyramid – influences the Medicare program, which relies on current payroll taxes to pay for a significant portion of health care benefits for already retired beneficiaries.
Like pensions, those health care benefits have not been fully funded by the beneficiaries during their own working lifetimes. Any consumption by retirees in excess of what was funded comes from the generations that follow. As aging baby boomers swell the ranks of Medicare beneficiaries, we face an enormous increase in costs with a relatively unchanged number of workers over which to spread the much higher expenditures.
The political term for deficit spending is “kicking the can down the road,” a euphemism for saddling future generations with potentially crippling debt caused by underfunded pensions and excessive health care spending. Stabilizing the Medicare Trust Fund can be accomplished by a combination of extending the future retirement age and marginally increasing Medicare payroll taxes. Incremental taxes to fund promises made to previous generations will inevitably reduce discretionary income and spending for subsequent generations, a natural consequence of kicking both cans down the road.
As troubling as it is to contemplate the impact of unfunded promises, an even greater threat to future discretionary income looms in the form of runaway health care costs for subsequent generations themselves. Between 2001 and 2016, average health care expenditures for a working household of four (insurance premiums plus out-of-pocket expenses) more than tripled, increasing from $8,400 to $25,800. Of the $25,800 per household expended in 2016, $11,000 on average was incurred directly by the employee while $14,800 represented employer-paid insurance premiums. A recent forecast by the CMS Office of the Actuary predicted that private health care spending would increase by an average annual rate of 4.9 percent over the next 10 years; based on such a trajectory, spending per working household would exceed $50,000 by the year 2030.
At the two ends of the income spectrum, for very different reasons, health care costs become something of an academic discussion – the very wealthy can afford care no matter how expensive it becomes while the very poor cannot afford it no matter how inexpensive it becomes. The real collision between health care spending and household spending on other necessities occurs among the subset of the population tenuously living from paycheck to paycheck. Nearly 100 million Americans live in working households with annual incomes ranging from $25,000 to $75,000. For those families, today’s average out-of-pocket health care spending of $11,000 represents 15 to 44 percent of their annual household income.
If health care spending approaches $50,000 per working household by 2030, assuming that employers absorb the same proportion of the total spending that they do today and that wages increase by 2 percent per year over the same period, out-of-pocket costs will account for 22 to 65 percent of annual household income. It is difficult to imagine those families being able to afford other costs related to housing, food and transportation, to say nothing about the impact that the absence of discretionary spending will have on the rest of the economy.
A study currently underway at the Vizient Research Institute™ explores the long-term repercussions of unchecked health care spending on the economic sustainability of our delivery system. It is not clear that we can arrive at an affordable level of spending per working household even if we eliminate most or all of the avoidable waste that we know exists today. What is clear, however, is that we cannot afford health care spending of $50,000 per household in a competitive global economy. It is possible that the only variable that will remain – which interestingly is also the single biggest difference between spending here and spending in Europe – will be the unit prices that we pay ourselves. As health care spending increasingly crowds out discretionary consumer spending, and in a global economy with intense downward pressure on working wages, our traditional pricing conventions may become unsustainable.
The social bargains crafted when the baby boomers were young, promising pension and health care benefits that exceed the funds set aside during working years, will have significant repercussions for the generations that follow the boomers as they age into retirement. But in order of magnitude, those are soup cans to be kicked down the road. Unless we change the trajectory of current health care spending, a substantial portion of the working population will become insolvent. And booting that can down the road will be like kicking a 55 gallon oil drum.
