Demographic Issues– Will you be able to afford my retirement? –

Economics 102

Winter 2001

Mr. Smitka

US pop profile

Old Age BoomThe inevitable consequence of a “baby boom”

Dependency Ratios

An Aging IndexAn easily understood indicator is the aging index, defined here as the ratio of persons aged 60 and over to the number of youths under age 15. In the Americas in 1997, this ratio ranged from a high of 82 in Canada to a low of 9 in Nicaragua. Over the next 3 decades, it will double or triple in most nations. By 2025, several nations will have a smaller youth population than they have persons in the 60-and-over category.

Retirees are Increasingly Expensive

When a Baby Boom Ends…It’s not just the US that will be affected!

How to Quantify?• The counterpart of our lifetime

consumption model:

• Generational Accounting– What is the tax burden, net of transfer receipts,

for an individual?• Calculate for each generation, each year henceforth

– What policy adjustments are needed to provide a “level” tax rate across generations?

• No generation should subsidize another

At present, the old benefit from transfers, the middle-aged pay

– women have lower incomes, work less & live longer –

FG = “future generations” projection

But as age & income profiles shift...

• Some generations receive relatively few benefits

• Some generations paid relatively less in taxes, but enjoyed benefits

• Some are caught in the middle

• And some will pay a lot, to finance the post-WWII “baby boom” … ceteris paribus.

Table 2 shows...

• Data are lifetime net tax rates (avg, men & women)

• You’ll pay 28% of lifetime labor earnings as net taxes.

• Earlier estimates showed higher rates. Now: – Labor income is expected to grow more – Medical care transfers grow faster– Higher projected income taxes partially offset

– Source: CBO Technical Paper Series, Feb 2000Gokhale, Page, Potter & Sturrock

“Generational Accounts for the US: An Update”

Implications for the US

• Under current tax and transfer policies– I will have a good old age– Future generations will pay very high taxes

• Feasible?!– Depends on the political system – …. and your response

• Pressures increase if:– Government grows in step with population– Bush really cuts taxes

In a democracy ...

• The old have disproportionate clout at the polls – The elderly’s clout will rise as “boomers” retire

– The disenfranchised (≤18) population won’t fall

• The wealthy have disproportionate clout via lobbying– Those under 40 have little wealth or power from

professional status

– The AARP (the largest US lobby) will only grow

End of Course• The dismal science remains true to its name

– One possible solution: import from the rest of the world

– But the US is an international debtor - the rest of the world will cash in their IOUs some day.

• International issues will loom large for other reasons, too.– Comparative advantage can expand the pie for

everyone, so not all bad!

• Have you arranged for a term abroad yet?