June 1998 | EPI Study
DEFUSING THE BABY BOOMER TIME BOMB
Projections of income in the 21st Century
by Dean Baker
It is commonly accepted in public debate that the retirement of the baby boom generation will place an enormous burden on the working population in the first decades of the next century. Economists and political figures have issued dire warnings about the tax burdens that will be needed to support Social Security, Medicare, and other retirement benefits when the baby boom generation reaches retirement age.
This paper examines the reality behind these warnings. It uses projections from the report of the Social Security trustees and from the Health Care Financing Administration to derive projections for after-tax wages, after-tax family income, and after-tax, after-health-care family income (the money available to families after paying their taxes and their projected health care expenses) at four points in the next century: 2010, 2030, 2050, and 2070. These projections are carried through for workers and families at various points of the income distribution under a variety of scenarios.
The projections show:
- In a base scenario, which assumes that health care costs rise only with the aging of the population and per capita growth of the economy, and that there is no increase in wage inequality, after-tax wages and family income will be more than 30% higher in the year 2030 for an average family than at present. After-tax, after-health-care income will be more than 41% higher in 2030 than today. In addition, the average year-round worker will be enjoying nearly two weeks a year more in vacation than do workers today.
- In 2030, when the peak impact of the baby boomers’ retirement will be felt, the burden on workers will be a reduction in after-tax wages and family income of slightly more than 6%. More than one-third of this increase will be attributable to increased life expectancy over this period, not to the large size of the baby boom cohort.
- If health care costs rise at the rate currently projected by the Health Care Financing Administration, then after-tax, after-health-care income in the year 2030 for a family in the middle of the income distribution will be 14% lower than in the baseline scenario. Thus, the impact of rising health care costs is more than double that of the retirement of the baby boom generation. Furthermore, more than two-thirds of this 14% income decline is attributable to an increase in private sector health care expenditures. This means that efforts to stem the growth of public sector health care spending will have only a limited effect in protecting the living standards of future workers, unless private sector costs are also contained.
Rising inequality, like exploding health care costs, poses a far greater threat to the living standards of most Americans than the retirement of the baby boomers or the aging of the population. If current trends continue, the reduction in after-tax family income for families in the middle of the income distribution is 22%, more than three times as large as the loss due to the retirement of the baby boomers.
The combined effects of rising health care costs and increased wage inequality lead to an actual decline in after-tax, after-health-care income for most of the population through the next century. The projected loss in the year 2030 for a family in the middle of the income distribution, compared to the baseline, is 37%, or more than six times as large as the impact of changing demographics.
The study also includes projections incorporating the Boskin Commission claim that the CPI overstates inflation by 1.1 percentage points annually. These projections paint a vastly brighter picture of the future. All the categories of before- and after-tax wages and income are more than 40% higher than in the base scenario; the improvement due to this adjustment vastly exceeds any gain that could be accomplished through policy shifts. If the Boskin Commission’s conclusion is correct, then there was never any reason to worry about the well being of future generations.
The study also includes projections showing the impact of increasing spending on education and reversing the rise in wage inequality experienced over the last quarter century. These policies more than offset the losses from demographic change for everyone except families at the top of the income distribution.
The public attention given to the problems the nation will face as the baby boomers retire has been largely misplaced. By itself, the retirement of the baby boom generation will not prevent workers in the future from enjoying substantially higher living standards than do workers today. But tomorrow’s workers still face another, more serious problem: rising health care costs and growing wage inequality threaten to greatly diminish the future living standards of most workers. In order to protect the well being of future generations, it will be necessary to bring health care costs under control and to stop, if not reverse, the trend toward greater wage inequality.