In the U.S. of 2028 we expect the population to reach 350 million persons with life expectancy at birth of 81 years. Twenty-six percent of the population will be 19 years or younger, that is, they will not yet be working. On the top side, twenty percent of the population will be 65 years and older, a greater share than of the population of Florida today. They will not be required to work either. In the middle we find 54% of the population, the working and tax-eligible population. Basically, every one of these persons will support not only themselves but also fully support one member of the dependent population for their full working life.

Between 2003 through 2007, a pre-Baby Boomer retirement period, Social Security tax revenue ($648 billion) and Medicare tax revenue ($200 billion) accounted for almost a third of total government revenue increases. By 2028 the retired population will include those 80 million Baby Boomers, no longer paying taxes but collecting benefits. In fact during 2010 and 2030, cost growth for Medicare will be higher than for Social Security because of the rising cost of health services, increasing utilization rates, and anticipated increases in the complexity of services. Medicare costs continue to grow rapidly after 2030 due to expected increases in the cost of health care for persons stretching towards their 81st birthday.

Looking out for Number One means that making the tax cuts of today permanent will cost as much as paying off the shortfalls in the Social Security and Medicare Hospital Insurance trust funds.

Absent reform, the Social Security Trust Funds will be exhausted in 2041 and the Medicare Part A Trust Fund will be exhausted in 2019. Revenue dedicated to these entitlement programs under current law will not be enough to pay for scheduled Social Security and Medicare Part A benefits.

Absent reform and assuming revenue held constant at about 18 percent of GDP (the historical average level), government spending will eventually exceed the government’s ability to pay.
Paying for our tax cuts will require monumental reductions in spending or increases in other taxes. If offsetting the revenue losses in 2014 requires a 48 percent reduction in Social Security benefits, a 57 percent cut in Medicare benefits, or a 117 percent increase in corporate taxes, what will 2028 require?

Absent reform, the projected cost of all federal programs will exceed available resources. Rising expenditures and reduced tax receipts will mean growing budget deficits and rising National Debt. Combined these trends will cause government debt levels to more than triple by 2040 and to more than double again by 2060. The nation’s debt could approach 600 percent of GDP by 2080. Unless the government brings program cost in line with available resources, resulting budget deficits will be so large that the government will not be able to borrow enough to fund them.

How will that impact the US economy? While tax cuts increase the size of the economy slightly and temporarily, they reduce economic growth in the long term, in part because higher federal deficits will have a negative effect on long-term saving, investment and capital accumulation, the keys to rising economic prosperity.

Financing the projected entitlement spending entirely by revenue increases requires that taxes collected by the federal government rise from about 18 percent of GDP today to about 24 percent of GDP in 2030, an increase of one-third in the tax burden over the next twenty-five years, with more increases to follow.

Financing the projected increase in entitlement spending entirely by reducing outlays in other areas requires spending for programs other than Medicare and Social Security be cut by about half, relative to GDP, from its current value of 12 percent of GDP today to about 6 percent of GDP by 2030. In today’s terms, this action would be equivalent to a budget cut of approximately $700 billion in non-entitlement spending.

Financing the projected increases in entitlement spending by reducing entitlement spending in Social Security and Medicare requires beneficiaries accept approximately 75% of promised benefits.

Financing the projected increases in entitlement spending by an immediate drop in per capita consumption of about 4 % or by an increase in national saving of about 3 % is required. Future generations, then enjoy per capita consumption that is only 4 percent, rather than 14 percent, below what it would have been in the absence of population aging. The large improvement in the living standards of future generations arises because of the added savings from the current generation being invested in extra capital by businesses.

Remember, saving more requires that we all buy less, play less and work more! Encouraging older workers to remain active is important. To retain or attract older workers, employers could offer higher wages, more flexibility in work schedules, increased training directed toward older workers, and changes in the retirement incentives provided by pension plans. Attracting replacement workers by opening our national doors to foreigner workers is an option.

Other way to increase the future productive capacity of the economy is to devote more government revenue to improving our education system, expanding access to post-secondary, increasing on-the-job training, and stimulating basic research. Making tomorrow’s workers more productive, benefits everyone.