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Demographic Issues
– Will you be able to afford my retirement? –
Economics 102
Winter 2001
Mr. Smitka
US pop profile
Old Age Boom
The inevitable consequence of a “baby boom”
Dependency Ratios
An Aging Index
An 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 postWWII “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 2000
Gokhale, 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?