NCPA - National Center for Policy Analysis

The Rising Cost of Government Spending on the Elderly

November 12, 2001

By the time the first of the baby boomers begin to retire, Social Security and Medicare will begin paying out more in benefits than they collect in payroll tax revenues. As a result, taxes will have to rise if the government keeps its promises to people entering the labor market today.

  • Spending on Social Security and Medicare Part A combined will swell to 23.8 percent of payroll by the time today's teen-agers reach retirement age in 2050, according to the Social Security Administration's intermediate forecast.
  • Federal subsidies for Medicare Part B and other health care benefits for the elderly will increase the mid-century tax burden to 32 percent.

Nor is this the worst that can happen. According to the pessimistic assumptions:

  • When today's 18-year-olds reach retirement age, Social Security spending will equal 21.7 percent of payroll - more than twice the current burden.
  • When Medicare and other elderly health programs are included, spending in 2050 will equal 54.4 percent of taxable payroll.

Despite all the recent attention to Social Security's long-term fiscal insolvency, health care spending is an even bigger problem. Health care spending will outpace Social Security spending by the time today's teen-agers reach retirement age, according to intermediate assumptions - or during the baby boomer retirement years, according to pessimistic assumptions.

The reason for the financial crisis is that the elderly retirement programs are based on pay-as-you-go finance. If the current system were replaced now with a funded system, workers could make deposits to funds that invest in interest-earning assets, and benefits would not be dependent on the willingness of future generations to pay taxes.

Source: John C. Goodman and Matt Moore, "Government Spending on the Elderly: Social Security and Medicare," NCPA Policy Report No. 247, November 2001.

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