The great danger of an aging society is that the rising costs of government retirement programs -- mainly Social Security and Medicare -- could increase taxes or budget deficits so much that they reduce economic growth. This could trigger an economic and political death spiral. Our commitments to pay retirement benefits grow while our capacity to meet them shrinks. Workers and retirees battle over a relatively fixed economic pie.
The debate we're not having is how to avoid this dismal future. President Bush's vague Social Security proposal sidesteps the critical issues. His noisiest critics are equally silent.
Just recently, the trustees of Social Security and Medicare issued their annual reports on the programs' futures. Here's one startling fact that emerges from a close examination of the reports: By 2030, the projected costs of Social Security and Medicare could easily consume -- via higher taxes -- a third of workers' future wage and salary increases.
The facts are hiding in plain sight. The trustees' reports project Social Security's and Medicare's spending. They also estimate future wages and salaries -- the main tax base for Social Security and Medicare. Comparing the two shows how much retirement costs may erode wage increases. The reports should make and highlight this calculation, but they don't. So I asked economists Tom Saving of Texas A&M and Eugene Steuerle of the Urban Institute to do it.
Here are the basic numbers, as calculated by research assistant Elizabeth Bell. In 2005, Social Security and Medicare are expected to cost $822 billion; by 2030, the costs are projected to rise to $4.640 trillion, an increase of $3.818 trillion. Over the same period, annual wages and salaries are projected to rise from $5.856 trillion to $17.702 trillion, an increase of $11.846 trillion. Despite the big numbers, the arithmetic is straightforward: The increases in Social Security and Medicare represent 32 percent of the increases in wages and salaries.
This matters because Social Security and Medicare are pay-as-you-go programs. Current taxpayers pay current benefits. Consequently, baby boomers' children and grandchildren face huge tax increases. Social Security and Medicare now equal 14 percent of wage and salary income, says Bell. By 2030, using the trustees' various projections, that jumps to 26 percent.
It can be argued that the costs are bearable. The wage gains in the trustees' reports could prove too pessimistic. Like all forecasts, they're subject to many possible errors. But there are at least two flaws in this logic.
The first is that, on a year-to-year basis, wage gains would be tiny -- less than 1 percent. When they've gotten that low before, people have complained that they're "on a treadmill" and that the "American dream" has been repealed. Even these gains might be diluted by tax increases to trim today's budget deficits.
The second and more serious threat is that higher taxes would harm the economy. They might dull economic vitality by reducing investment and the rewards to work and risk-taking. Then we'd flirt with that death spiral: We'd need still-higher taxes to pay benefits; but those taxes might depress economic growth more.
Because the dangers are so obvious, we ought to be minimizing them now. We ought to redefine the generational compact to lighten the burden of an aging population on workers. The needed steps are clear: to acknowledge longer life expectancies by slowly raising eligibility ages for Social Security and Medicare; to limit future spending by curbing retirement benefits for the better-off; to keep people in the productive economy longer by encouraging jobs that mix "work" and "retirement."
All advanced societies face a similar problem: how to support more retirees with (relatively) fewer workers. But we won't engage it. We prefer to let someone else make the hard choices, years from now when they will be much tougher.