THE COMING GENERATIONAL STORM
March 21, 2005
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).
- Over the next 30 years, the number of elderly in the United States, 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 researchers, 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 United States, 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, says the study's coauthor, Laurence Kotlikoff, a senior fellow with the NCPA. 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 United States.
Reforms to our nation's entitlement programs offer hope, says Kotlikoff. Any reform proposal that relies on increased saving instead of pay-as-you-go financing helps ease the future problem.
Source: Laurence Kotlikoff, Hans Fehr and Sabine Jokisch, "Aging, the World Economy and the Coming Generational Storm," National Center for Policy Analysis, Policy Report No. 273, February 2005.
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