The Fiscal Costs of Demographic Winter

June 21, 2012

As we blogged recently, New Hampshire’s age pyramid is inverting such that the composition of the population under the age of 18 is shrinking while those over the age of 65 is increasing. This shift will also have significant fiscal impacts at the federal, state and local levels. In a recent study –by Ronald Lee and Ryan Edwards titled “The Fiscal Impact of Population Aging in the U.S.: Assessing the Uncertainties”–highlights the government fiscal implications of this demographic shift. They find that:

“Population aging, accelerating as the baby boom generations age, will have important fiscal consequences because expenditures on Social Secuirty, Medicare, and institutional Medicaid make up more than a third of the federal budget . . .changing demographic realities will require some combination of substantial tax increases or substantial benefit cuts, or other forms of restructuring.”

Below are two key charts from their report. While they are pretty self-explanatory and disturbing, we want to point out a few items:

  • While children are expensive, those over 65 are even more expensive. While the fiscal costs of those  under the age of 18 are around $7,500 (in 2000 dollars), the fiscal costs of those over the age of 65 are 2.5 times that thanks to Medicaid, Medicare, and Social Security.
  • At the same time, the level of taxes paid by those over the age of 65 (since they are retired after all), plummets by 75 percent.
  • Fortunately, New Hampshire is somewhat better shielded by this drop in taxes because we rely more on property taxes (as a percent of total State and Local revenue) than other states. The drop in property taxes paid by those over 65 is much smaller–in fact, most of the drop is from income and payroll taxes.
  • On the flip side, Medicaid, Medicare, and Social Security are mostly funded by Uncle Sam. This hurts New Hampshire because we are already a net donor to Uncle Sam’s coffers (pdf), meaning we pay more in taxes than we receive in benefits getting only 67 cents back for every tax dollar. As such, higher federal taxes to pay these benefits will hurt the state economy.

Chart Showing Beneftis by Program and Age

Chart Showing Taxes by Program and Age