The burdens placed on the Social Security and health care systems in the U.S. by an aging population will require congressional action to ensure the programs’ solvency, witnesses told the House Ways and Means Committee Thursday.[@@]

The U.S. population is undergoing a dramatic demographic shift as the baby boom generation enters retirement age, they said.

“These shifting demographics define the challenges families and policymakers alike must tackle,” said Walter Welsh, chairman of Americans for Secure Retirement, a coalition of insurance industry groups and organizations representing women, Hispanics, farmers and small businesses.

The life expectancy for a 65-year-old is close to 83, and more than half of all retirees are now expected to live beyond the average life expectancy, he said.

The likelihood of living longer compounds both the savings and financial management challenge for individuals and families: Retirees not only need to save more; they also need to manage resources effectively so they can sustain a steady standard of living for 20 to 30 or more years, Mr. Welsh said.

Douglas Holtz-Eakin, director of the Congressional Budget Office, argued that some action must be taken because the economy itself will be unable to adjust to the shift.

“It is very unlikely that productivity growth could by itself solve the projected budgetary shortfalls,” he said.

Growth in productivity is measured by two factors: the growth in the amount of productive capital per worker and technological advances that increase the amount of goods and services that can be produced by a given level of capital and labor, he explained. These factors are combined as TFP, or total factor productivity, he said.

“The rate of growth of TFP would have to shift upward in a very unlikely way to close just the budgetary gap in Social Security, and that gap is only a small part of the rise in consumption demands for the economy as a whole,” Holtz-Eakin said.

The larger problem of the retirement system will be the health care issue, according to Social Security Advisory Board chairman Hal Daub.

“Future increases in the cost of health care for the aged will put severe strains on the financing of Medicare and Medicaid, complicate the nation’s ability to finance Social Security and other budgetary priorities, and undermine the ability of employers to provide retiree health benefits,” he said in his written testimony. “Moreover, these cost increases will also eat into the adequacy of the cash income of the aged through large escalation in premiums and other out-of-pocket costs.”

Citing a July 2004 memo from the actuary for the Centers for Medicare and Medicaid Services, Daub noted that an age-65 beneficiary with average medical costs would see their premiums and out-of-pocket expenses rise to 91% of the benefit in 2078.

In seeking to solve the problem, lawmakers must look beyond simply funding seniors, he said.

“If we are to have a rational and successful retirement security policy, the health care part of that policy must be viewed as much more than simply a question of financing,” he said. “We need to find ways to rationalize the health care system, constrain its costs and improve the quality of care.”