THE WORLD IS AGING. IN DEVELOPED NATIONS, THE PROPORTION OF THE POPULATION 65 AND OVER IS EXPECTED TO AS MUCH AS DOUBLE BY 2025

The elderly population will increase as a percentage of the total population throughout the world over the next 40 years. By 2025, in most developed countries, one in five persons will be age 65 and older. Japan and Canada will experience the greatest increase in the developed world of the percentage of the population that is elderly.

In the developing world, the concentration of elderly in the population will begin by 2025 to approximate today's concentration in the developed countries.

SOURCE: U.S. Bureau of the Census. An Aging World. Forthcoming, 1986.

Although the oldest-old are expected to grow as a proportion of the population over the next 40 years, they are now only 2 to 4 percent of the population in the developed world, and will grow by 2025 to only 3 to 5 percent in most developed countries. Of the developed nations, Japan will experience the greatest increase in the proportion of the population 80 and older-from 1.7 percent in 1985

to almost 5 percent in 2025. The United States and Canada will also have a substantial increase in the proportion in the oldest ages. In most of the developing world, the oldest-old will still account for less than 2 percent of the population by 2025.

SOURCE: U.S. Bureau of the Census. An Aging World. Forthcoming, 1986.

THE U.S. GROWTH RATE IN THE 65 TO 74 AGE POPULATION WILL BE AMONG THE WORLD'S SLOWEST OVER THE NEXT 20 YEARS AND AMONG THE MOST RAPID IN THE DEVELOPED WORLD IN THE SUBSEQUENT 20 YEARS

Over the next 20 years (1985 to 2005) the United States will have an unusually slow growth rate in the young elderly population of 0.26 percent, largely as a result of low birth rates during the 1930's. With the exception of Sweden and the United Kingdom, much of the rest of the world will have a more rapid growth in the elderly population. Japan's rate of growth in the elderly population during this period will be the most rapid in the developed world, over 10 times that of the United States at 2.70 percent.

In the subsequent 20 years (2005 to 2025), the United States will experience a very rapid rate of growth in its young elderly population, as a result of the aging of America's "baby boom." Although Canada, Sweden, and the United Kingdom will experience a similar acceleration in the rate of growth of the elderly population, other developed countries will experience a slow-down in the rate of growth during this period. Japan will have a particularly sharp drop-off in the rate of growth in its young elderly population

The Federal Government also provides pensions and compensation in exchange for services provided to the Government. It provides disability compensation and pension benefits to veterans of military service and to its own former employees and their survivors 65 years or over. About 12 cents of every Federal dollar spent on the elderly in fiscal year 1986 went to support these programs. A third area of Federal involvement with the elderly is in providing means-tested benefits to elderly poor who are unable, despite the existence of a universal social insurance system, to meet basic subsistence needs. About 4 cents of every dollar spent on the elderly in fiscal year 1986 is expected to be used to provide Supplemental Security Income (SSI) benefits, housing, food stamps, energy assistance, and social services to low-income individuals.

The fourth area of Federal spending on the elderly includes programs of general benefit to the elderly such as social, nutrition, and employment services provided through the Older Americans Act, research conducted through the National Institute on Aging, and volunteer services through ACTION agency. Less than 1 percent of the elderly's share of the Federal budget is spent on these programs.

B. COSTS TO INDIVIDUALS AND FAMILIES INCREASED FEDERAL SPENDING FOR HEALTH CARE HAS NOT REDUCED HEALTH COSTS TO OLDER AMERICANS

While the enactment of Medicare triggered the most rapid growth in Federal spending for the elderly, it has not effectively reduced the burden of health care costs for the elderly and their families. From a program spending $7 billion in 1970, Medicare has grown to a program with $70.2 billion in Federal outlays in 1986. Over the last 12 years, Medicare outlays have increased at an average rate of 18 percent, more than twice the rate of inflation and one-third faster than the growth in national personal health care expenditures. Even with savings measures enacted in the 1980's, it is still projected to grow at least twice the rate of inflation through the end of the decade.

Despite this growth in annual spending, Medicare payments increasingly fail to keep pace with rising health costs. Health care expenditures not paid by Medicare have been rising steadily as a percent of elderly income. By 1984, health spending not paid by Medicare equaled 15 percent of the average per capita income of a person 65 years or older. The elderly pay one-fourth of their total health care bills out-of-pocket.

Medicaid was enacted to provide matching funds to the States to finance health insurance for the poor, including supplemental insurance for the elderly poor covered under Medicaid. Medicaid has also grown rapidly with Federal and State outlays rising from $4.9 billion in 1970 to $37.5 billion in 1985. Federal Medicaid payments going to the elderly amounted to $14.1 billion in 1986, more than three and a half times the amount spent on the elderly only a decade earlier. The portion of total Medicaid spending attributed to the elderly has remained about the same over the last decade, 37 percent in 1974 to 38 percent in 1986.

C. LONG-TERM FINANCING

THE LONG-TERM GROWTH IN FEDERAL SPENDING WILL BE FOCUSED ON HEALTH CARE COSTS

Today, rising health care costs rather than spending for retirement income, are the greatest source of the increase in public spending on the elderly (table 6-2).

Social Security retirement and disability benefits, which grew from 2.5 percent of GNP in 1965 to 5.2 percent in 1983, are projected to decline to 4.2 percent by 2005, and then increase slightly to 5.7 percent by 2030.2 Other pension benefits paid from the Federal budget are expected to decline from 2 percent of GNP currently to about 1.2 percent of GNP by 2030.2

TABLE 6-2.-FEDERAL PENSION AND HEALTH PROGRAMS AS A PERCENTAGE OF GNP AND THE BUDGET: 1965 to 2040

1 Estimates for 1984 to 1988 are based on CBO baseline assumptions (August 1983); forecasts for 1990 and beyond are based on intermediate assumptions of the Social Security and Medicare actuaries.

2 Forecasts for 1990 and beyond are based on the assumption that the Budget accounts for 24 percent of GNP.

3 The discontinuity in the estimates of pension and health benefits as a percent of GNP between 1986 and 1990 is due to the Social Security trustees assuming that OASDI will grow at a faster rate than CBO in the late 1980's and the Health Insurance trustees assuming that Medicare will grow at a slower rate than CBO assumes.

Source: John L. Palmer and Barbara B. Torrey, "Health Care Financing and Pension Programs," prepared for the Urban Institute Conference on "Federal Budget Policy in the 1980s," Sept. 29 and 30, 1983.

On the other hand, health care costs will continue to grow steadily; in 1970, Medicare and other Federal health programs accounted for only 1.6 percent of GNP, but by 1986 Federal health spending had risen to 2.9 percent of GNP. With no change in current law, Federal expenditures on health are projected to increase to more than 6 percent of GNP by 2030. In short, if health care costs are not brought under control, Federal spending on health care will equal, or even surpass, Federal spending on retirement income within the next 50 years.

2 Palmer, John L. and Torrey, Barbara B. Health Care Financing and Pension Programs, Sept. 29 and 30, 1983.

Overall, the share of the Federal budget going to the elderly is expected to remain fairly stable for the next two decades, as declines in the share for retirement income spending offset increases in health spending. Only then should overall spending on the elderly rise as a proportion of the budget, and then only if health costs have been allowed to rise unchecked in the interim.