Abstract
Recent decades have seen the emergence of massive public sector transfer programmes in industrial nations. Because many transfers are age related, the population age distribution is a powerful influence on government budgets, and ageing will be very costly. We construct stochastic projections of the budgets for the federal and state/local governments, disaggregated by programme. These are driven by stochastic population projections and by stochastic projections of productivity growth and real interest rates. The demography influences budgetary outcomes through the age specificity of seven categories of tax payment and 28 government spending programmes, as well as through public goods expenditures, debt service and provision of congestible services. Forecasts of government deficits and debt under current tax and benefit trajectories make it clear that adjustments will have to be made in the future to avoid implausibly high and unsustainable debt levels. Subsequent forecasts are conditional on an upper bound to the federal debt/GDP ratio of 0.80. There is a very slight chance (2.5%) that the overall tax burden will barely rise, but most likely it will have to increase by 62% (from 24% in 1994 to 38% of GDP in 2070), and there is a slight chance that taxes would rise by 120% (to 53%). We have not yet explored adjustment through reduction of benefits. The expected GDP shares of child related expenditures and age neutral expenditures are both flat up to 2070. The expected share of old age expenditures, however, rises from 8.5% of GDP in 1994 to 22.5% in 2070. We find that there is a strong negative correlation between rates of expenditure on child-oriented programmes and on elder-oriented programmes, as one would expect given the importance of fertility for both outcomes. Thus, focusing exclusively on the tax burden resulting from population ageing could somewhat exaggerate the increases needed in the future. We also find that the rising cost of Social Security benefits (OASDI) accounts for only 28% of the rise in old age expenditures; fixing Social Security will not in itself fix the federal budget. The rising costs of health care will contribute even more and must be addressed as well.
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Acknowledgements
We are grateful to Bryan Lincoln, Timothy Miller and Carl Boe for their research contributions to this project and to Alan Auerbach for helpful discussions at the planning stage. Lee’s and Edwards’s research for this paper was funded by a grant from NIA, AG11761. Tuljapurkar’s research for this paper was funded by a grant from NICHD, HD32124. The authors would also like to acknowledge support by Berkeley’s NIA-funded Center for the Economics and Demography of Ageing.
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Lee, R., Tuljapurkar, S., Edwards, R.D. (2010). Uncertain Demographic Futures and Government Budgets in the US. In: Tuljapurkar, S., Ogawa, N., Gauthier, A. (eds) Ageing in Advanced Industrial States. International Studies in Population, vol 8. Springer, Dordrecht. https://doi.org/10.1007/978-90-481-3553-0_4
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