The Economics of Aging

This session, featuring a presentation by noted economist Victor R. Fuchs, is the keynote event to launch a series of Forum discussions on aging-related issues as Congress and the nation begin to focus more attention on restructuring Medicare and Social Security. This Forum initiative, “Taming Entitlements and Preparing for Baby Boomer Retirements,” is designed to assist dialogue among the various health, tax, and other committee or agency staff who will ultimately have to reconcile competing elements of income and entitlement policy changes. The series will explore the nature of and linkages among entitlement programs, such as Medicare, Medicaid, Social Security Disability Insurance (SSDI), Supplemental Security Income (SSI), and Old Age and Survivors’ Insurance (OAS!), commonly referred to as Social Security. Beyond looking at the varying degrees to which seniors rely on these entitlement programs for services and payments, the Forum will also focus on private resources—private health insurance, Medigap policies, pension funds, individual retirement accounts, investments, and personal savings—and the ways in which changes in one program or financing source have implications for others.

Presentation abstract: Most older persons face two potentially serious economic problems: (a) declining earning power and (b) declining health that can be partly offset by increased utilization of health care. The decline in earning power is largely attributable to physiological changes and to obsolescence of skills and knowledge. These adverse effects are exacerbated by public and private policies that reduce the incentives of older persons to continue work and increase the cost to employers of employing older workers.

The problems of earnings replacement and health care payment are usually discussed separately, but there are several reasons why they should be considered together. First, there are often tradeoffs between the two. Money is money, and for most people there is never enough to go around. This is self-evident where private funds are concerned. Low-income elderly, for instance, frequently must choose between expensive prescription drugs and an adequate diet. For middle-income elderly, the choice may be between saving on medigap insurance or forgoing an airplane trip to a grandchild’s graduation. Difficult choices are also inherent in the allocation of public funds. The same tax receipts that could be used to maintain or increase retirement benefits could be used to fund additional care, and vice versa. In discussing these tradeoffs, some analysts assert that people will gladly give up other goods and services for medical care that cures illness, relieves pain, or restores function. Others believe that some people would forgo some health insurance in order to maintain access to other goods and services.

A second reason for looking at the two problems together is that they pose similar questions for public policy. How much should each generation provide for its own needs in old age, and how much should be provided by the generations that follow? How much provision should be voluntary, how much compulsory? How much intra-generational redistribution is appropriate after age 65? How well can private markets serve the elderly’s desire for annuities and health insurance, and when are public programs more efficient?

Finally, the problem of health care payment is approaching that of earning replacement in economic importance and, by 2020, will far exceed it. Declining health after age 65 results in substantial increase in use of prescription drugs, hospital admissions, repair or replacement of parts of the body, rehabilitation and physical therapy, and assistance with activities of daily living. New technologies offer great promise for offsetting the health problems of aging, but often at considerable expense. Overall, per capita expenditures for health care after age 65 are between three and four times as great as for those under 65.

This presentation will focus primarily on the (thus far) inexorable increase in consumption of health care by older Americans. If this increase continues and if the government’s share of the total remains unchanged, the tax burden on younger cohorts could become intolerable. Concomitantly, if the private share remains unchanged, the ability of the elderly to obtain other goods and services would be sharply diminished. Although the emphasis of the session will be on aggregate and average results, levels and trends in income inequality among the elderly will also be examined and compared with inequality at younger ages. The session will conclude with a discussion of changes that might avert the economic and social crises foreshadowed in the data.

Victor R. Fuchs is the Henry J. Kaiser, Jr. Professor Emeritus at Stanford University, where he applies economic analysis to social problems of national concern, with special emphasis on health and medical care. He was professor of economics in the Economics Department and the School of Medicine’s Department of Health Research and Policy from 197 4 to 1995. His published work covers a wide spectrum of subjects ranging from health and medical care to issues of family, gender, and children. He is the author of nine books, the editor of six others, and has published over one hundred articles.

His best-known work, Who Shall Live? Health, Economics, and Social Choice, published in 1974, helped prepare a new generation of health professionals for the economic and policy problems that have emerged in recent decades. (An expanded edition of Who Shall Live? has just been published.) Subsequent books include How We Live (1983), The Health Economy (1986), Women’s Quest for Economic Equality (1988), and The Future of Health Policy (1993). He is the editor of Individual and Social Responsibility: Child Care, Education, Medical Care, and Long-term Care in America, published in 1996.

Fuchs’s contributions have been recognized by his designation as distinguished fellow of the American Economic Association and by his election to the American Philosophical Society, the American Academy of Arts and Sciences, and the Institute of Medicine of the National Academy of Sciences. He was the first economist to receive the Distinguished Investigator Award of the Association for Health Services Research and has received the Baxter Foundation Health Services Research Prize.

In 1995, Fuchs served as president of the American Economic Association. He has been a research associate of the National Bureau of Economic Research (NBER) since 1962, was vice president of the NBER from 1968 to 1978, and has twice been a fellow at the Center for Advanced Study in the Behavioral Sciences. He is currently studying the relationships among empirical research, values, and economic policy.

A discussion featuring

• Victor R. Fuchs
  Henry J. Kaiser, Jr. Professor Emeritus
  Stanford University

NHPF is a nonpartisan education and information exchange for federal health policymakers.