Free «The Baby Boomers Retirement Threatens to Debilitate the Economy as Funds like Medicare, Medicaid, and Social Security Will Be Insufficient to Finance Their Needs» Essay Paper

Background

Human capital could be considered as the ultimate earning asset as well as source of added value securing any nation’s GDP. The US, along with the rest of the OECD, has long fared due to its baby boomers as the wider layer of the populace pyramid accounting for the bulk of demand and labor productivity. Together, they have mapped into a high-level equilibrium clearing the GDP in absolute terms. Although the GDP per capita might not be varying materially across the layers or strata of comparable age, this ageing problem has loomed large over the past decades. Moreover, it was suggesting that many of the net contributors toward value added or public goods are increasingly turning out net consumers or beneficiaries. Consequently, in per-capita terms, the numerator warps as the denominator expands, which amounts to double pressure.

At that rate, any economy is challenged with barely breaking even stopping for a short period of collapsing to a Ponzi scheme. Much of the dilemma is connected with the retirement setup and individual planning, even though this is just one necessary prerequisite rather than a sufficient prop. On the other hand, the inter-related yet distinct pillars such as Medicare, Medicaid, and Social Security, should be treated as the best complementary solutions, if they remain functional without worsening the situation according to their own right.    

1. Nature & Causes

The agenda could be improved considering the demographic account of human capital, which is aging while being replaced as well as possibly invested or augmented. The conventional breakdown, involving the baby boomers, the generation X, and the millennial kids, have long revealed some kind of singularity out West or ‘up North,’ with the GenX’ers without filling the replacement gap between the other two layers. Inter-generationally, one could thus spot an unsustainable design, with the maturing generations not adequately combined for the earnings or demand chasm (Zolli). Unlike in the Oriental or traditional societies, boasting the regular-shaped population pyramids, the hourglass pattern of distribution might not even allow for normality as warranted for robust statistical inference.

Moreover, not only baby boomers retire as employees, and the bulk of the resultant job destruction could also be blamed on them as employers. Therefore, it would be too myopic to judge that the employment prospects are likely to improve for the generation X and the similar millennials. For one, the former group has mostly fared well anyway, enjoying hefty payoffs on the strength of the opportunities as ushered in by the baby boomers. Over the short haul, unemployment might be contracting - in line with the recent post - 2008 reports. However, far from many outside opportunities, the digital and e-commerce domains are likely to be created in the interim run, after the millennials have fully unleashed the whole new economy or filled the missing or incomplete markets, left out of the potential general equilibrium, bus still emerge.

There is no assurance that the Southeast Asian or Pacific economies will leave this slack untapped for so many years along the road. Their low labor cost has been vanishing as the ultimate competitive or comparative advantage However, the wages are likely to grow at a slower rate than their marginal labor productivity, which, in turn, is contingent or complementary to the technology. Moreover, given the dominant pattern of their imports largely comprised of investment goods and durables, technology spillover should be in sight globally, thus denying critical advantages along the same old lines. Therefore, it remains connected with the human capital as the ultimate source of technology and knowledge solutions, rather than with either technology or labor costs as standalones. Nowadays, as the growing retiree-to-employee ratio contributes to the effective labor costs while detracting from human capital productivity, the US and the OECD will surely lose a competitive edge in terms of the productivity and demand.

In fact, many of these dimensions are overlooked in routine Keynesian analysis as well as monetarist exercises a la Friedman. The latter calls for money supply increases that may occur in compliance with a national debt hike while helping square the demand circle in the aftermath of recessions or post-bubble downsizing in the real estate or constructions cluster. Consequently, in light of the GDP per capita having contracted net of inflation over the past decade (“US National Debt Clock”), it is unclear that the federal government is going to finance further social security programs out of deteriorating taxable base, unless their efficacy as well as efficiency improve dramatically. At the Keynesian end, it does not deny the effectiveness of government spending or social programs per se. Moreover, it does not point to their rewards irrespective of the actual multipliers for G, or program-specific quality. In fact, largely the same holds for investment I as mentioned above, albeit for very different reasons. In contrast, a high marginal propensity to consume, even if exhibited by the retirees or loan-spurred by the low-earning millennials, cannot possibly suffice as part of the multiplier. In case it happens, all of the otherwise remote issues are intertwined ultimately when driven by the human capital aging.

It is worth noting that the less scrupulous policymakers might treat the retirees as a depreciated asset not exactly qualifying them as earning human capital. It is not only the sort of unethical attitude, bearing in mind that people have earned an asset that amounts to the state’s or pension fund’s liability. In addition, it is also too shortsighted over the long haul and could only be rationalized as end-game opportunism. The reason is that relative property rights can only be respected and enforced mutually with employees as well as employers unlikely to stay committed to paying taxes and applying their best effort, unless they know the social planner or other insurance agents are going to follow. Reputation and trust outcomes are applied beyond the conventional policy predictability, though invariably accepted as incentives compatibility and credible threats.

As stated above, the domain of property rights and transaction costs, earmarking the efficiency of formal institutions or rules of the game, has not constituted the part of conventional macroeconomic planning or policymaking. The latter may have focused on long-term growth or short-term volatility without capturing full development or its sustainability across a complete scope of parameters. In fact, it may have rendered the selected programs, such as Medicare and Medicaid, prone to inherent clash. To begin with, they both may appear in contradiction with the non-overlapping target audiences, addressing the elderly and considering the fact that their residual standard of living should be high. In contrast, the latter has been involved to maintain subsistence or lower-bound healthcare standards for those in a worse situation, and only unless they have enough assets to satisfy the cost-induced needs.

2. Likely Consequences

Some might argue that the gap between the two groups has widened. There are cases when some people may face the incentives to divest their excessive assets, for example, find them redistributed to their heirs or dependencies, as a matter of indulging while seeking the rent. In fact, the unscrupulous attorneys may tap into that sort of rent more readily because the market margins decrease amidst indices such as S&P500 and DJIA nearing their correction. This could be more plausible, since the recent surge has been in contradiction with the fundamentals hovering sideways. Likewise, the principals or the selfsame retirees seeking to gain a decent return on asset allocation, when it comes to the Part C and Part D add-on tiers of Medicare, might tend to compromise some of the ethical dimension as long as they are risk-averse enough. In other words, just shifting the focus away from Medicaid to Medicare does not solve the issue and might instead pose a vicious circle.

What is more, the inherent actuarial dilemma between higher unbiased risks versus greater risk aversion as underpinning the willingness to pay extra amount for the coverage, has to be resolved or mitigated before arriving any policy implications. In part, these moral hazards or information cost could be kept irrelevant based on the corresponding studies finding that the actual Medicare expenditure distribution across states or regions varies being a subject to the physician’s discretion more than it does depending on the patient’s preferences (Cutler et al.). However, it happens that about one-third of that discretion may have been ill-grounded and biased, which posits moral hazard to its own right.  

As far as incentive compatibility or morale driven buy-in is concerned, it might be pointless speculating on the absolute and unqualified merits of pay-as-you-go or alternate retirement setups. Arguably, shifting the retirement age arbitrarily would contradict either the preceding standard of living or ex-ante life expectancy. For example, whereas the EU could afford gradual transition, namely a 67 threshold based on life expectancy of 86, it is totally unaffordable for many emerging markets facing high mortality or morbidity rates in their early 60s. At the same time, retirement and social security contributions out of payroll taxes into Medicare cannot be higher in the economies or regions confronted with lower expected retirement or healthcare benefits in relative or ratio terms, based on life expectancy versus prior payment horizon. However, the failure to keep this product of ratios fixed or invariant might provide the incentives for the would-be retirees to rely on their own market discipline while increasingly switching to private pension funds and insurance or hedging options. However, it is unlikely that the markets prove to be more efficient where the institutions fail to sterilize ex-post adverse selection or prior moral hazard.

In fact, some of the supposedly comprehensive surveys, such as Gruber and Wise, fail to take these facts into account, while providing only partial accounts only, regardless of the fact that they decompose the comparative-static effects of reforms in the present-value terms (63). It is worth noting that the analysis could be sensitive to discount rate volatility over the horizon chosen in the first place. At the same time, it would appear that they treat retirement expenditures in terms of option value (113-115). More generally as well as explicitly, one should realize that the related Medicare expenses, unlike Medicaid insurance coverage, could be seen as simple options that may or may not be exercised, in which light the federal and state governments could o face a partial burden relief. However, this is unlikely to secure a complete solution unless the rest of the long-term tradeoffs and trends are addressed in a sustainable or systemic manner.  

Moreover, the option approach cannot plausibly allow for hedging strategies like those based on asset derivatives or securitization vehicles that have triggered complexity outmatching regular uncertainty since the time of Enrongate.

3. Measures & Mitigating Remedies

Some of the hedging issues could be bypassed or replaced with makeshift remedies such as early retirement incentives. Fitzpatrick and Lovenheim have observed that ERIs, when applied in an educational vicinity, have impacted human capital formation rather favorably. The basic idea is to replace the elderly teachers or professors with younger teaching assistants, even though the content-driven or static program has not been involved via well-defined or enforced mechanisms.

Partial retirement as well as pre-tirement schemes involving shorter working hours or gradual hedging steps could be qualified as another instance of mixed strategy at work, to invoke game-theoretic lingo. These enable smooth optimization for real individual and households rather than seeing it net out or clear on average over the long haul, or for the ‘representative’ person only.

A related solution approach could pertain to portfolio immunization, whereby the effective composite duration or weighted-average maturity of assets is fine-tuned to the residual life expectancy (Fabozzi 541-48). In fact, that kind of strategy could be applied to micro-level or individual choice as well as state or federal budgeting and government investment policies for the sake of consistency’s and controllability’s.    

The further reconciliatory perspective is maintained by Gustman and Steinmeier seeking to integrate a variety of retirement premises. However, the model does not make full use of many real-world restrictions. For example, although the partial work status reversal leads to some crowding-out affects that might not proceed with the corner cases, such as full retirement, which is harder to undo towards either partial retirement or full-time employment than in the other possible way.

Alternatively, the nation might have to soften immigration restrictions in an attempt of revitalizing the labor force and human capital, with inter-state commuting or social mobility securing only a partial fix.

Conclusion

Apart from the human capital impacts, retirement and healthcare schemes could be intertwined in the ways suggesting critical reputational tradeoffs bordering on relative property rights. Human capital has to be augmented beyond depreciation driven replacement, and deployed over the short-term job creation. The retirees’ relative rights and cumulative assets should be greatly cherished since they are likely to signal the sustainability incentives while creating opportunities and filling the gaps through demographic transition. At the same time, the social planner ought to strike a careful balance between Medicare versus Medicaid, whereby the underinvestment in the latter might compromise the demand side while over-distribution would be prone to manipulative responses.