According to Ronald Lee, director of UC Berkeley’s Center for the Demography and Economics of Aging, consumption rises with age. As we get older our demands for wealth and resources, due in part to increased need for medical care, grow. This, of course, comes at exactly the time when our income tends to decrease because of retirement.
Lee will present “Some Economic Consequences of the Demographic Transition and Population Aging,” a free lecture on Tuesday, November 10, at noon at Princeton University’s Wallace Hall. Visit www.calendar.princeton.edu.
The differential between an older person’s increased need for money and his decreased income is what Lee calls the “life cycle deficit,” or LCD. LCD tends to inflate the older someone gets, according to a 2008 study presented by Lee last fall, and this issue is exacerbated by a still-growing life expectancy in the United States. “Longer life means workers need to accumulate more wealth for longer old age, or work longer,” he states.
There are many ways to acquire money for when we get old — pensions, which are becoming extinct; Social Security, which we pay into ourselves; and pay-as-you-go plans, such as 401ks.
But once we stop working our ability to contribute to such funds diminishes. One possible solution: Don’t stop going to work. At least not so soon.
Lee, a native of New York who earned his bachelor’s in philosophy from Reed College in 1963, his master’s in demography from Berkeley in 1967, and his Ph.D. in economics from Harvard in 1971, has used this argument repeatedly, particularly in the context of Social Security. Since its inception under FDR, Social Security has been a good idea with a shaky future. The question has not been whether we will get older but whether there will be such a thing as Social Security when we get there.
Lee says the system is wounded, but not fatally so. “We can fix the system through incremental steps,” he stated in a recent Q&A session at Berkeley. “The trust fund won’t fall close to zero for another 40 years, maybe 50, years depending on what projection you’re looking at,” Lee states. “You might or might not want to call this a crisis, but it is the case that we have to do something sooner or later, and the earlier we do it, the easier it will be.”
Lee says that a reasonable way to assess the financial soundness of the system is to ask how much we would have to raise taxes in order to make the system sustainable in the long run. The incremental steps he suggests “changing the rules here and there,” but essentially keeping the system the way it is now.”
We could raise the normal retirement age. We could raise the threshold at which earnings are no longer taxed. Or we could index benefit levels in such a way that they are less generous, Lee says.
Relative to other industrialized nations, the United States is on fairly stable ground. One reason is that America’s pension program “simply isn’t as generous as those in other countries,” Lee says. “In many European countries, the public pension will replace something like 80 percent of your earnings or your most recent earnings by the time you retire. In the U.S., it’s around 40 percent.”