Worldwide Generational Storm to Reduce Standard of Living


NCPA Study Shows Graying of Developed World to Lead to Higher Taxes, Lower Wages

DALLAS (December 9, 2004) – The developed world is about to experience the greatest demographic change in its history, which absent reform will eventually lower America’s standard of living by almost one-third (relative to what would have happened) by the middle of this century, according to a new study released by the National Center for Policy Analysis (NCPA). Go to http://www.ncpa.org/pub/st273/ to view the study.

“The generational storm approaching the shores of the developed world is much more threatening than is commonly believed,” said NCPA Senior Fellow Laurence Kotlikoff, the study’s co-author. Dr. Kotlikoff is also a professor of economics at Boston University.

Over the next 30 years, the number of elderly in the U.S., the European Union and Japan will more than double. At the same time, the number of workers available to pay the elderly their government-promised benefits will rise by less than 10 percent. According to the study, paying the elderly their promised benefits will require large tax increases, including sharply higher payroll taxes. For example:

  • In order to finance elderly benefits in the U.S., the payroll tax will have to climb to 23 percent over the next 30 years, while the average income tax on wages will rise from 10 to 14 percent.
  • Thus the total tax on wages will rise to 38 percent by 2030 and to 40 percent by mid-century.

Higher taxes mean lower after-tax income for workers. Less disposable income means less saving; less saving means less capital formation; less capital formation means lower labor productivity; and lower productivity means lower real wages.

“Ordinarily, one would expect an economy that is short of capital to turn to international capital markets,” said Kotlikoff. “But because the capital shortage in Europe and Japan will be even more severe, the two regions are likely to bid capital away from the U.S.”

Over the course of this century, the international capital shortage will raise real interest rates by 4.4 percentage points. It will also significantly reduce real wages:

  • Real wages of U.S. workers will be 10 percent lower than otherwise by 2030 and 15 percent lower by the middle of this century.
  • By 2030, projected tax hikes combined with the decline in pre-tax wages will cause workers’ take-home pay to be about one-quarter less than otherwise.
  • By mid-century, the American worker’s after-tax income will be almost one-third lower than would be otherwise.

“As bad as this sounds, reforms to our nation’s entitlement programs offer hope,” said Kotlikoff. “Any reform proposal that relies on increased saving instead of pay-as-you-go financing helps ease the future problem.”