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Government analysts portray a bleak fiscal future as the retirement of baby boomers and soaring health costs push up expenditures on Social Security, Medicare and Medicaid much faster than projected tax revenues. Some argue that the analysts' economic growth projections are too pessimistic. This analysis argues that official growth projections are quite reasonable, but even if they are too pessimistic, faster growth will accelerate Social Security costs because of the program's structure and health costs are also likely to grow more rapidly. Faster growth will, however, ease the pain associated with necessary reforms.
Can Faster Economic Growth Bail Out Our Retirement Programs?
As baby boomers reach retirement age and health care costs increase, spending on entitlement programs will escalate and put enormous pressure on the federal budget. Numerous commissions and individual researchers agree current fiscal policy is unsustainable. Is faster economic growth the solution?
About half of federal expenditures outside of defense and interest are devoted to people age 65 and up. The elderly population is growing rapidly and life expectancy continues to increase, lengthening periods of retirement. Meanwhile, the number of taxpayers will grow relatively slowly because of low birth rates since the mid-1960s.
Population aging alone is expected to cause Social Security, Medicare, and Medicaid costs to rise by about 3.5 percent of the gross domestic product (GDP) by 2030. Add the soaring health expenses per capita and the cost of the three programs rises by about 6 percent of GDP. If other government programs maintain the same share of GDP and the overall federal tax burden remains at roughly today's level—which slightly exceeds the average of the past 50 years—the national debt in the hands of the public will skyrocket from 36 percent of GDP in 2007 to 100 percent of GDP in 2030. Without fiscal reforms, the debt-GDP ratio will continue to accelerate until collapsing confidence in domestic and foreign capital markets brings the process to an abrupt halt.
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