Aging Population Is Biggest Challenge for Federal Budget

March 23, 2011

With Social Security deficits increasing and the U.S. population aging, policymakers today face a choice.  If they raise Social Security's maximum taxable wage -- a common proposal -- individuals will respond by working and saving less, which weakens the economy and does not fix the problem.  Instead, we should reduce Social Security benefits for middle- and high-income earners to encourage more working and saving -- and free up the government to focus on the daunting challenges of Medicare and Medicaid, says Andrew G. Biggs, a resident scholar at the American Enterprise Institute.

  • The largest fiscal challenge for the federal budget over the next several decades is the aging of the U.S. population, which will drive up costs for Social Security, Medicare and Medicaid.
  • In an aging society, smaller populations of working-age individuals must be productive enough to support ever-increasing numbers of retirees.
  • If society can sufficiently increase economic output, it can support those retirees without reducing the standard of living for working-age Americans.
  • In short, a strong and growing economy is the only way entitlement reform can avoid being a zero-sum game between young and old.

Given the challenges of an aging population, it is essential that public policy encourage individuals to work more, meaning more hours of the week and more weeks of the year; save more, meaning higher participation in employer-sponsored pension plans and increased contribution levels; and retire later, meaning putting off retirement after 62, when most Americans currently claim Social Security benefits.  These steps will boost the economy and help finance the Social Security program, alongside the even more daunting challenges of Medicare and Medicaid, says Biggs.

Source: Andrew G. Biggs, "The Case against Raising the Social Security Tax Max," American Enterprise Institute, March 2011.

For text:

http://www.aei.org/outlook/101039

 

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