The coming boomer bust: Some huge problems facing Minnesota

Like the scriptural prophet crying in the wilderness, the state economist and state demographer have warned Minnesota for two years that it must prepare for potentially devastating demographic waves.

Now, as elected officials in St. Paul wrestle with a $6.2 billion budget gap, demographer Tom Gillaspy and economist Tom Stinson have renewed their warnings in the context of upcoming budget decisions.

If you are getting ready to defend or debate the budget Gov. Mark Dayton is set to release on Tuesday – or, if you’re going to try your hand at MinnPost’s budget-balancing puzzle — you really should turn first to their new report, “The Long Run Has Become the Short Run: Budget Implications of Demographic Change.”

I’ll share a few highlights here.

“The 2010s will see Minnesota transform from a young state to an old state, from a work-based economy to a retirement-based, entitlement economy. Many of the rules that govern how the world ‘normally works’ will change and a new set of rules of thumb for the ‘New Normal’ will take their place,” they say.

With the baby boomers retiring, nearly as many people in Minnesota will turn 65 during this decade as in the previous four decades combined. And the aging ramps even higher during the next decade.

Here’s that part of the story in a picture. (This graphic and others in this article were provided to MinnPost courtesy Tom Gillaspy and the Minnesota State Demographic Center.)

The upshot is that by the end of this decade, Minnesota will have as many people age 65 and older as children in K-12 schools. And unless the state finds new ways to deliver and pay for health care and other services for older residents, it will have to curtail those services or pull money away from education.

Meanwhile, growth in the labor force will slow dramatically. And so will the economy unless we find ways to make Minnesota’s workers more productive.

But there is one big impediment to increasing productivity: The next generation of workers doesn’t have the skills that will be needed to replace the retiring boomers. Improving their skills is an urgent need for Minnesota.

But that takes time and investment — you can’t order up a new team of doctors or registered nurses overnight or even over a year or two.

Further, the state has not taken steps to increase revenues in tandem with projected growth, let alone in numbers sufficient to invest in the next generation of workers.

On top of these demographic factors, the Great Recession also slammed the brakes on growth for years to come.

Here is the sum of all of these factors: Unless Minnesota breaks promises it has made to its elderly citizens, neglects the education of its K-12 students, finds new revenue or finds cheaper ways to deliver services, here’s how the revenue growth stacks up next to the projected spending for those two categories alone.

The spike in elderly medical assistance isn’t driven by the sheer number of retirees alone. A good share of it comes from inflation of health care costs. Getting a grip on that factor is a prime state and national challenge.

And the brutal truth is that Minnesota will be so boxed in by health care costs it will have little money left for other services. 

So there you have it. Something big has to happen in this state in terms of changing expectations or finding new strategies. If it doesn’t happen, something big will collapse.

Minnesota’s two prophets — Stinson and Gillaspy — were appropriately Minnesotan in stressing the strength of the state’s accomplishments.

“Minnesota’s experience since World War II has been remarkable. Minnesota went from a below-average education and below-average income state to a national leader in both measures. This relationship is not coincidental. Improving educational outcomes improved the quality of the workforce, matching the demands of the late 20th century economy. Minnesota’s achievement was in creating a well-educated, hard-working, easily trained, highly productive workforce that produces quality goods and services. By 2009, Minnesota ranked fifth in the nation in employment ratio, 13th in median earnings of full-time year-round workers, 10th in median family income and third-highest in cost of living adjusted income. … Minnesota also ranks 11th in the percent of the adult population with at least a bachelor’s degree and second in the percent with at least a high school diploma. Minnesota has performed well, with rising incomes led by rising education achievement levels.”

However, they end the report on an appropriately stern prophetic note:

“The most successful organizations and economies face a special difficulty during times of great disruptive change – the tyranny of success. The smugness that comes from past success can be a great pitfall. Often, the very factors that lead to past success can be the source of failure. Failures of leadership, vision, strategic focus and policy that lead to past success can become the Achilles’ heel as technological and market conditions change over time … Minnesota, as a successful economy, must avoid the tyranny of success if it is to be successful in the future. Future changes, led largely by demographic shifts, will be so disruptive that businesses and governments will require a new business model.”

Finding that new business model is particularly challenging for governments, they say. Unlike a business that can gauge what customers want, the state must determine Minnesota’s needs.

“The private sector has a means of dealing with organizations that do not get the wants/needs equation right,” they say. “Not so the government sector. Market forces do not directly give governments clues about whether the government is on the right course. For this, constant monitoring of progress towards a commonly accepted vision is necessary.”

Sharon Schmickle writes about national and foreign affairs and science. She can be reached at sschmickle [at] minnpost [dot] com.

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Comments (20)

  1. Submitted by Patrick Wells on 02/14/2011 - 06:08 am.

    Another relevant economic fact is the average baby boomer has less than $50,000 in savings and no pension. I think that the baby boomers will not have the financial ability to ever retire.

  2. Submitted by Eric Larson on 02/14/2011 - 07:04 am.

    Why is this soooo hard? It’s simple but painful. Minimal lay offs if any at all. All state employees and state aided employees take a pay cut and benefit cut. Work for less, do more and say your happy to have a job. Simple, painful, but very logical. If the govt employee doesn’t like it, they’re fired. That will go a long way towards solving the issue.

  3. Submitted by Dennis Tester on 02/14/2011 - 07:08 am.

    “Market forces do not directly give governments clues about whether the government is on the right course.”

    Sure they do. It’s just that government doesn’t pay attention.

    Case in point: When the demand for a business’ product declines, the business closes factories, reduces overhead and headcount to react to the changing market.

    It now takes $16,421* per year of taxpayer dollars to educate one child in the Saint Paul Public School system, even though the student population has been in a steady decline for years. With the “customer base” decreasing, when do we see a corresponding reduction in the budget?

    *2011 budget: $624 million / 38000 students

  4. Submitted by Cynthia Bemis Abrams on 02/14/2011 - 08:46 am.

    Very good piece that helps everyone understand the factors that make this all so difficult. Some we have known about for decades, like the cost of health care and the demographics of the baby boom. Others, like sending all sorts of jobs overseas, allowing our manufacturing base to erode and the recession, were unthinkable.

    The key phrase is in Sharon’s last paragraph: “constant monitoring of a commonly accepted vision.” For 8 years, we had leadership that could not deliver a vision, time passed, all the shifts that were predicted happened. If Stinson and Gillaspy’s wake up call can’t spur us to accept the responsibility and get creative, then we are as pathetic as 5th graders the night before the Science Fair.

  5. Submitted by Fran Tarkleton on 02/14/2011 - 09:12 am.

    Eric – State employees have had their wages frozen for 6 of the last 10 years. If the next proposed freeze passes (which is almost certain), that will make it 8 of 12. A recent study released by the Minnesota Taxpayers Association showed that state employees in professional level positions are underpaid compared to equivalent employees in the private sector.

    Do the math. If you want to keep Minnesota strong, you can’t keep beating up on government workers. If you continue beating up on them, you will position yourself as undesirable in a market that is going to see mass retirements. Mass retirements means that large numbers of jobs will be clamoring for a handful of qualified people. This is the opposite of what we are used to – large numbers of qualified people clamoring for a handful of jobs. You can’t underpay and create a negative work environment and expect people to stick around. Your approach will lead to a massive outflux of young, talented workers from the state of Minnesota. And this is at a time when we need to be *attracting* them.

  6. Submitted by Bill Gleason on 02/14/2011 - 09:18 am.

    An excellent article.

    And as you point out, the general direction of things has been clear for some time.

    There are solutions to these problems, but the demagoguery has got to stop. Political leaders of both parties have to step forward and take responsibility.

    Slash and burn alone – is not the answer. No sources of revenue are obviously necessary. The longer this painful subject is put off, the worse it is going to be when we are finally forced to take action.

    Sad.

  7. Submitted by Bill Gleason on 02/14/2011 - 10:38 am.

    apologies: “no sources” -> new sources

  8. Submitted by Lance Groth on 02/14/2011 - 11:17 am.

    A few quick observations:

    – Older folks will constitute an overwhelming voting block as the boomer retirement scenario unfolds. They are not going to vote to cut their own benefits.

    – Adopting anti-immigrant policies, which is all the rage these days in some circles, is exactly the wrong thing to do. We need more workers paying into the kitty, not fewer.

    – Health care costs and education costs have risen dramatically, year after year, for a long time. I’ve never understood how either, health care in particular, can increase by multiples of inflation every year. We need somehow to get a handle on this. I don’t believe that the profit driven private insurance model is appropriate for health care.

    – Nationally, we need to throttle defense spending, by focusing on what truly constitutes “defense”. Like so many great powers before us, we are suffering from imperial overstretch and have reached a point at which we can no longer afford the burdens of empire. One could ask the Brits about that experience.

    – We need a Marshall Plan for energy independence for several reasons, not least of which so that we can stop sending our national treasure to oil producing states overseas.

    – Buy local.

  9. Submitted by Eric Schubert on 02/14/2011 - 11:42 am.

    Thanks for this piece and digging into demographics, Sharon. One of the big opportunities (and essentials) for the state, which you’ve pointed out in earlier posts is the transformation of long-term care financing.

    The Citizens League has a great report that starts to show the way (see link below). This is a real innovation opportunity for policymakers on both sides of the aisle and citizens. It’s essential if we want roads, trains, classrooms or any other public infrastructure.

    http://www.citizensleague.org/what/policy/aging/

    Also below for Minnesota demographic junkies are two other items of state interest:

    1. The first is a major survey that Ecumen commissioned of MN baby boomers in 2007 and their views/expectations on aging. Some interesting findings related to “paying for aging.”

    2. The second is a major survey done by the Minnesota Department of Human Services on boomers preparing Minnesota for the Age Wave.

    http://www.ecumen.org/aging-resources/16-the-ecumen-age-wave-study/

    http://www.dhs.state.mn.us/main/idcplg?IdcService=GET_DYNAMIC_CONVERSION&dDocName=id_054450&RevisionSelectionMethod=LatestReleased

    Eric Schubert
    Ecumen
    http://www.changinagingblog.org

  10. Submitted by Steve Aschburner on 02/14/2011 - 11:45 am.

    Pick your poison: An aging Minnesota or, to name one of many, a consistently corrupt Illinois. That’s what we found since moving down here in 2010. A bankrupt state for lot more insidious, intolerable reasons than MN’s woes.

    Two helpful trends for MN:

    1) Social Security finish line likely to get moved later and later. Citizens will have to keep working longer, thereby bolstering the workforce.

    2) If so many Minnesotans will be geezers, there shouldn’t be as much demand for K-12 schooling.

  11. Submitted by Beth Dhennin on 02/14/2011 - 11:55 am.

    Demonizing the public school/college system is NOT the solution, nor are public workers the culprit! In fact, it looks like education IS a priority after all…Seems to me that now is the time to find new revenue: the lop-sided income tax rate favoring the wealthy must be changed – and tapped.

  12. Submitted by Kristin Jorenby on 02/14/2011 - 12:55 pm.

    Lance – unfortunately if the current legislature has its way the older voters will not have a say in what happens in state government because huge numbers of them will not be able to vote any longer with the proposed changes to voter requirements.

    Also, while I don’t claim to be an expert in economics it is obvious that free market societies do not deal well with public goods, such as health care. Government jobs cannot keep pace with private sector jobs that are equivalent just s health care cannot correct its costs in the same way a widget factory can.

    It has become evident that we will all be working much longer than we thought. Government and private businesses alike are going to have to become more creative and make more concessions on all sides in order for this to work out in a positive way.

  13. Submitted by Ginny Martin on 02/14/2011 - 03:33 pm.

    Social Security has nothing to do with the national budget deficit. It is self-funded (by us; don’t forget–that’s OUR money that is being paid out) and solvent and will remain so until 2037. And we don’t have to raise the age before getting retirement benefits or cut benefits. The government quits taking money out of individual paychecks for SS at about $106,000. All we have to do is raise that limit.
    But much of the hoohaw and hysteria by republicans to “privatize” it because it costs so much money is just a shield to try to get the American people to put money into toWall Street. Doesn’t sound like a good idea to me.

  14. Submitted by Dave Thompson on 02/14/2011 - 03:58 pm.

    A fascinating article. Please keep up the good work!
    We are all going to be working longer. The retirement age will get moved back to 70 for full benefits. I hope we replace pensions with 401(k)’s across the board. People live into their 90’s now, and the public can’t afford to pay for the extra decades of life made possible by medical advances.

    I also agree with the commenter who suggested we should welcome increased immigration. As baby boomers retire, jobs will actually be lost due to a lack of replacement workers. This is a tougher problem than you might think. There is no substitute for experience. What you want is, a mix of experienced hands and young ones, so that the knowledge in our heads doesn’t retire with us. This is one of the main reasons why public education needs to switch from a seniority-based retention system to a system that allows at least some young teachers to be hired and to advance. You can’t have just old teachers (or police officers or engineers or …).

  15. Submitted by Eric Schubert on 02/14/2011 - 04:58 pm.

    Here’s another story that would be interesting in this mix: What are the innovation opportunities for Minnesota in the Age Wave? Yes, we know there are incredible problems if we don’t innovate, but what could the future look like in new products, services, community planning, public policy, etc.? Could be really interesting. Aging fascinates people b/c it’s all about our own lives and those we love.

  16. Submitted by Ray Schoch on 02/14/2011 - 04:59 pm.

    A fine piece, Sharon.

    Mr. Larson is amusing… Never having reached median income in any of the metro areas where I’ve lived, you’ll pardon me if I’m not as enthused about the idea of public employees taking a pay and benefit cut as he seems to be. But then, he’s not talking about sacrificing pay or benefits himself – it’s those other guys, the lazy bums, who should get less.

    Right wing lunacy aside, I’ve seldom seen, in many, many pages of reading about health care policy over a decade and more, a better argument for nationalized, single-payer, government-administered health care than is provided by the charts in Sharon’s article. More than any other single factor, what’s killing state budgets, and twisting the national budget into a pretzel, is the spectacularly-rising cost of health care.

    My personal whipping boy is the guy – I can never remember his name, so I must be repressing it – who’s the CEO of United Healthcare. He was paid $109 million in 2009, according to the ‘Strib. For that kind of money – far more than any human being could genuinely earn in a lifetime, much less a single year – what benefit did he bring to either the society or United Healthcare’s premium-payers in the form of improved health care?

    Education costs are, as Lance Groth suggests, another puzzle, and I say that as a retired teacher of 30 years’ experience. The constant increase is not going into teacher salaries, which remain far below the median for people with similar education and licensing requirements. In terms of buying power, teachers are generally no better off today than they were in the 1970s. Even administrator salaries have not gone up enough to explain the constant rise in costs, though some have risen to levels that are sometimes hard to justify.

    But medicine and, to an even greater extent, education, are not, and cannot be transformed into, some sort of “cost-effective” model that fits the industrial mode. Dealing with human beings is always more time and attention-intensive than cranking out widgets on the assembly line.

    That said, there’s a tsunami on the horizon – I’m only a year or two ahead of it, being a WW II baby – and neither the state, nor the nation, nor the aging boomers themselves, are really quite ready for it. Denial, as they say, ain’t just a river in Egypt, and by avoiding discussion of this huge issue, Minnesota does itself no favors.

    I have no interest in subsidizing the lifestyle of insurance company executives, and could get better care in my last year living at home – and for far less money – than I’d get in the kind of “senior facility” my family is likely to be able to afford. Yet, caring for one’s elderly and infirm parents is not one of the items that Madison Avenue has spent a lot of time glamorizing to the general public, nor is it a burden that most couples spend much time thinking about when young, or willingly take on in middle age. The model we’ve been sold by the consumer culture and, increasingly, right wing rhetoric, is that we’re all on our own. If that’s truly the case, we’re doomed.

  17. Submitted by Stephan Flister on 02/14/2011 - 05:05 pm.

    For those advocating raising the retirement age, here is a report from the Center for Economic and Policy Research demonstrating this proposed changes has a differential effect by income (life expectancy for lower wage earners is not increasing).

    From the summary:
    “If the normal retirement age is increased to age 70 over the next 25 years, as advocated by many
    policymakers, then the rise in the retirement age will continue to offset most of the increase in life
    expectancy. In the event that trends in inequality continue, then workers in the bottom half of the
    wage distribution will see a decline in the expected length of their retirement. For these workers, in
    the higher retirement age scenario, the expected years of retirement will be less for the 1973 birth
    cohort than it was for the 1912 birth cohort.”

    http://www.cepr.net/documents/publications/ss-2010-10.pdf

  18. Submitted by David Greene on 02/14/2011 - 06:28 pm.

    This article is a pretty good summary of the challenges ahead but leaves out a big one: transportation. Because we have an aging population, we should be building out our public transportation systems NOW so that we are ready when lots of people have to give up the car keys. We must keep our elderly population mobile and independent. It improves health and sustains economic activity.

    There is a critical need to public transportation in Greater MN. Anything outside the metro tends to get ignored when decisions are made about public transportation.

    As for school costs, there are several things contributing to increased costs in the central cities and inner suburbs:

    – The physical plants are aging and expensive to maintain relative to new construction in the exurbs.

    – These communities tend to have more low-income families, which puts additional pressure on schools and students (reduced-priced lunches, challenges getting time to do schoolwork, multiple jobs reducing parent/child interaction etc.).

    – The communities also tend to have more immigrant populations, though exurban and especially rural areas are seeing these trends too. This means more cost to provide educational opportunities for non-native English speakers. etc. This is NOT an excuse to curb immigration. It is simply a reality and we have to attend to it. As noted by others, immigration is the lifeblood of the economy.

    We can relieve some of the education cost by improving our transportation system. Why do we have school districts running bus systems? Shouldn’t we have a public transportation system that works for everyone, including students?

  19. Submitted by Tom Weyandt on 02/14/2011 - 11:53 pm.

    “Minnesota’s two prophets — Stinson and Gillaspy — were appropriately Minnesotan in stressing the strength of the state’s accomplishments.”

    I wonder whether the “Minnesota Miracle” is still alive and well. I doubt that we can continue to tout the strength of the “state’s accomplishments” if we look at current results. We are slipping in some of the categories such as graduation rates and more aptly compared to placed like Arkansas these days.

    Great article that no one at the Capital will dare to be seen reading, much less addressing the points raised.

  20. Submitted by David Greene on 02/15/2011 - 11:18 am.

    > Great article that no one at the Capital will dare
    > to be seen reading, much less addressing the
    > points raised.

    That’s a little too cynical. There are lots of good people in office at the capitol. Plenty of people are thinking about these issues. Unfortunately, they are not in a position to do much about it at the moment. Arguably, they never really have been, but their day is coming. The current situation is a temporary setback.

    The arc of history is long, but it bends toward justice.

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