Paying for the future

Over the next few decades we are going to see a major transitional period in America. The primary element of this transition is the aging of the Baby Boomer generation and their movement into retirement and of course eventual reduction via natural causes.

One would like demographics to look like a pyramid with each age group being slightly less than the next younger group. This would lead to a fairly stable relationship between number of people in prime earning years, retirees and students. That sort of demographic would allow for an orderly approach to the various infrastructures required to support each group.

However, the baby boomers distorted that pyramid and in fact they will in some ways continue to distort it for quite a bit longer. In addition, advances in health care and life expectancy have compounded the problem, as the boomer generation is not only getting older, but can also be expected to live longer.

The problem with this is that we have set up social systems that require current workers to pay for the retirement benefits and medical benefits of those who are retired. We never wanted to tax the boomers enough to secure either Social Security or Medicare financially in the future.

So as the ratio of workers to retiree drops the current tax structure will be insufficient to fully fund these benefits. So, we are faced with three options, increase taxes, reduce benefits or increase debt. The first two options are very difficult to accomplish politically so we see the third option being implemented.

Is this a sustainable option? Ultimately it may be, but only over a very long time period. It is certainly predictable that in the future, the demographics may return to a better ratio and that the benefits paid drop below the taxes collected. At that point we could see debt reduced. However, this is so far in the future that the problem is supporting the debt for such a long time. Also, the debt itself creates an expense related to the interest payments required.

The only real solution is to balance the expenses and the taxes. Since cutting benefits is extremely difficult, and the amount that can be saved via efficiencies is simply not enough to balance the budget, we need to consider how to increase taxes.

This of course is unrelated to any further increase in Government outlays, simply based on the deficits that will be created supporting our current systems. This tax burden can not easily be borne by the smaller percentage of the population that is of working age and needs to be shared across the demographic spectrum.

I believe the most important thing we should be doing in this country is looking at ways to increase our tax base. I believe a consumption tax that replaces business taxes would lead to two things if applied appropriately, an increase in jobs in this country and an increase in tax revenues. If jobs increase, we will either get boomers to work longer or alternately, attract immigration of younger people who will share the burden. To increase jobs we need to reduce the cost of doing business in this country and further make sure that anyone selling product in this country pays a fair share of taxes.