How to Solve the Aging Crisis

By 2030, one in five Americans will be over the age of 65, almost twice the ratio than at the beginning of this century. While the age wave has policymakers concerned over how federal programs like Social Security and Medicare will hold up as fewer workers pay for a larger elderly population, John Shoven of Standford offers an innovative way of making the problem go away: Change the way we measure age.

What if, instead of measuring age by how many years it's been since we were born we think about age in terms of the chance we'll die?

In 2000, men first reached a mortality risk of one percent at the age of 58, two percent at 65 and four percent at 73. In 1970, those risks were much earlier: 51, 59, and 68, respectively.

The story is similar for woman, but the progress has been a bit slower. While men in 2005 are effectively seven years younger than same-aged men in 1965, women are only four years younger. However, woman live longer than men, so a 70-year-old woman in 2000 is the same (mortality risk-adjusted) age as a 65-year-old man in 2000 and a 59-year-old man in 1970.

Now let's look at how this pertains to our definition of elderly:

Today, people aged 65 have a mortality risk of 1.5 percent, and as we said earlier, will make up about 20 percent of the population in a couple of decades. But over that same time period, the proportion of the population with a mortality risk of 1.5 percent is not expected to be over 16.5 percent. Looking at aging in this way, the growth in the elderly population is much more muted.

The fraction of the population that is classified as elderly is projected to grow by approximately 66 percent by 2050; whereas with the 1.5 percent and above mortality criterion, the fraction of the population classified as elderly is projected to grow by only 20 percent.

Shoven also proposes another method of measuring age: the number of years a person has left to live.

Using this method reveals an interesting story behind the decline in labor force participation. The conventional aging method tells us that men were retiring three years earlier in 2005 than they were in 1965. But for men with a remaining life expectancy of 13 years, labor force participation in 1965 was 50 percent. In 2005, that same labor force participation rate was associated with men expected to live another 19 years. Males leaving the workforce relatively early are getting an extra six years to enjoy retirement.

"Such a dramatic increase in the length of the average retirement has quite a bit to do with the financial strains faced by Social Security and defined benefit pension plans. Providing for a 19 or 20-year retirement with a 35 or 40-year career is much more difficult than providing for a 13-year retirement. Unless retirement ages begin to adjust with [the expected number of years left to live], today's young people could spend forty percent of their adult life out of the workforce."

Now, if labor force participation (as measured by remaining life years) were to stay the same, the size of the labor force would grow by 9.6 percent by 2050 and GDP could be 10 percent higher, meaning the crunch on Social Security and Medicare would be much more manageable.

The only hiccup is that all of the increase in life expectancy for adult men in the twentieth century has gone not to extra years working, but to retirement. Shoven doesn't expect that trend to continue in the 21st century, but argues that many provisions in Social Security, Medicare and tax laws encourage early retirement and should be reformed.

"Pension laws and programs feature lots of conventionally defined ages that have not been adjusted for improvements in mortality and life expectancy. For instance, the 59.5 age after which money can be withdrawn from tax deferred retirement accounts hasn't changed since it was introduced decades ago. Similarly, the age of early eligibility for Social Security (62), the age of Medicare entitlement (65), and the age that one must begin withdrawing from tax deferred saving accounts (70.5) haven't changed in at least the past forty years, if ever. These critical ages will likely need to be adjusted if we expect much of the increase in life expectancy in the 21st century to be devoted to work instead of retirement."

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