Could the Recession Save Medicare and Social Security?

Workers retire later and save longer--but then it gets complicated

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It would seem to be a matter of common sense that Medicare and Social Security, two massive and taxpayer-funded social programs, would suffer during the recession. After all, there's less tax revenue to fund them and, as Americans have less, they rely on government programs more. But it may not all be so simple. In fact, the recession could even be helping the programs. Here's how.

  • Delayed Retirement Means More Tax Revenue  The RAND Corporation predicts that, as the recession causes Americans to retire later in life, they will actually give more tax revenue to the social programs and take out less. "An unprecedented upturn in the number of older Americans who delay retirement is likely to continue and even accelerate over the next two decades, a trend that should help ease the financial challenges facing both Social Security and Medicare," they write. "An evolution in the skill composition of the nation's workforce, according to the study. As American workers have gained more education, they have achieved jobs that are more fulfilling, they face fewer physical demands in the workplace and they are paid more for their efforts."
  • How To Take Advantage of This  RAND recommends, "Lawmakers may want to consider reforms that would dismantle barriers that discourage some older people from remaining employed and even consider changes that would encourage employers to hire older workers." For example, "Changes to Social Security that delay full benefits from age 65 to age 67 will not be fully in force until 2022, and there have been discussions about further extending the threshold as well. In addition, as labor force participation among younger women has risen over time, women have become increasingly likely to qualify for Social Security benefits on their own work record. As a result, women now more than ever face direct incentives to extend their work lives in order to qualify for higher benefits."
  • That's a Red Herring  EconoBlogger Mark Thoma insists that retirement age isn't the principle factor in the cost growth in social security and medicare. "The CBO has argued persuasively (scroll down) that demographics is not the main problem," he writes, noting the graph below. He sighs, "bad economic policy that creates lots of uncertainty -- something Congress is expert at -- extends their working lives":
  • Bernanke: It's Not That Easy  Fed Chairman Ben Bernanke said in a speech in Dallas, "The economist John Maynard Keynes said that in the long run, we are all dead. If he were around today he might say that, in the long run, we are all on Social Security and Medicare. ... As our population ages, the ratio of working-age Americans to older Americans will fall, which could hold back the longrun prospects for living standards in our country." He sighed, "To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above."
This article is from the archive of our partner The Wire.