Given the declining ratio of workers to reitirees, the level of increases to fix the shortfall would be too burdensome and would negatively impact consumption of workers who aren't retired.
Reducing the rate of growth in benefits for future retirees could work if implemented in an appropriate manner. An outright reduction in benefits would be too punitive on retirees and would further dampen consumption. Instead, the reduction in benefits would need to be accompanied by a new model called consumerism where consumers have greater accountability for the costs of their healthcare decisions. but, dramatically improved transparency in quality and pricing would be necessary for this model to work. In this way, consumers could shop for healthcare services just as they already shop for other goods and services. This would help healthcare services be more subject to the market forces of supply and demand and would help to contain healthcare costs.
However, transparency and changes in consumer behavior in purchasing healthcare services would be gradual. For this reason, consumerism should represent one of several policy changes. Charging Social Security taxes on income over $90,000 and reducing the rate of growth in benefits for wealthy retirees are an economic necessity. The Social Security system was designed for social protection. Wealthy retirees do not need this safety net. Further, increased taxes and a reduction of benefits for the wealthy would not have a large negative impact on their consumption because they have ample discretionary income to maintain their consumption preferences.
Last, but certainly not least, raising the retirement age should be a part of the total solution. Social Security's original retirement age of 65 was set in 1935 when life expectancy was 63 (Cauchon, 2005). Today, according to Cauchon, life expectancy is 77 -- and, for those who live to 65, life expectancy is 83. Just a one-year increase in the retirement age would be equal to a 7% benefit cut and would eliminate about one-third of Social Security's projected $3.7 trillion...
Further, the one-year increase would defray a fall off in consumption for these workers.
Conclusion
Aging baby boomers pose significant challenges to GDP through not only strains in government spending, but also declines in consumption. The problem is huge and any single policy change would be unlikely to adequately address the issues. Those solutions that are the most promising are the promotion of consumerism to make healthcare consumption adhere to supply and demand market forces; higher taxes and less benefits for the wealthy who do not need the Social Security/Medicare safety net; and raising the retirement age by just one year.
Bibliography
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CEA memo on Social Security. Retrieved at http://www.whitehouse.gov/news/releases/2005/02/20050204-12.html
Cohan, P. (2007, October 15). Will baby boomers bankrupt social security? Retrieved at http://www.bloggingstocks.com/2007/10/15/will-baby-boomers-bankrupt-social-security/
Facts on policy: Consumer spending. Hoover Institution. Retrieved at http://www.hoover.org/research/factsonpolicy/facts/4931661.html
Morin, R. And Russakoff, D. (2005, February 10). Social Security problem not a crisis, most say. Washington Post. http://www.washingtonpost.com/wp-dyn/articles/A12231-2005Feb9.html
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