NCPA - National Center for Policy Analysis

ECONOMIC DEATH SPIRAL

April 12, 2005

Just recently the trustees of Social Security and Medicare issued their annual reports on the programs' futures. One startling fact emerges from the reports: By 2030 the projected costs of Social Security and Medicare could easily consume -- via higher taxes -- a third of workers' future wage and salary increases. Toss in Medicaid (which covers nursing home care and isn't included in the trustees' reports) and the bite grows. We're mortgaging workers' future pay gains for baby boomers' retirement benefits, says Robert Samuelson.

The trustees' reports project Social Security and Medicare spending. They also estimate future wages and salaries -- the main tax base for Social Security and Medicare. Comparing the two shows how much retirement costs may erode wage increases.

According to economists Tom Saving of Texas A&M University and Eugene Steuerle of the Urban Institute:

  • In 2005 Social Security and Medicare are expected to cost $822 billion (that's net of premiums paid by recipients).
  • By 2030 the costs are projected to increase to $4.640 trillion; that's an increase of $3.818 trillion.
  • Over the same period, annual wages and salaries are projected to rise from $5.856 trillion to $17.702 trillion -- an increase of $11.846 trillion.
  • Despite the big numbers, the arithmetic is straightforward: The increases in Social Security and Medicare represent 32 percent of the increases in wages and salaries.

Consequently, baby boomers' children and grandchildren face massive tax increases. Social Security and Medicare spending now equals 14 percent of wage and salary income. By 2030, using the trustees' various projections, that jumps to 26 percent.

The great danger of an aging society is that the rising costs of government retirement programs -- mainly Social Security and Medicare -- increase taxes or budget deficits so much that they reduce economic growth. This could trigger an economic and political death spiral, says Samuelson.

Source: Robert Samuelson, "Economic Death Spiral," Washington Post, April 6, 2005.

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http://www.washingtonpost.com/wp-dyn/articles/A28419-2005Apr5.html

 

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