US Government Debt Different - Finance Department - University of ...

102 The Federal Debt: Assessing the Capacity to Payabilities or other large spending or revenue shocks — and perhapsmost important, the difficulty of reaching a political consensus thatwill allow the necessary policy changes to be made in a timely fashion.Effects of AgingLower birth rates and longer life expectancies than in the past makepopulation aging inevitable, both in the U.S. and abroad. One ofthe most salient statistics is the old-age dependency ratio — the percentageof people over age 65 relative to the size of the workingagepopulation. That ratio is expected to climb rapidly over comingdecades, from 21.6 in 2010 to 39.0 by 2040 for the U.S., and bysimilar amounts in the rest of the world. With significantly fewerworkers per retiree, living standards will improve more slowly thanin the past, unless productivity growth turns out to be high enoughto compensate. Nevertheless, in the absence of the pressures createdby aging on the federal budget, many experts predict that populationaging would have modest effects on the macro economy. 1However, because the costs of the largest federal expenditure programsare tied to the number of retirees, projections of increasedfederal spending as a share of the economy can be largely attributedto the effects of population aging. For example, absent the effect ofaging (and excess health care cost growth), federal spending on itsmajor health care programs such as Medicare and Medicaid and onSocial Security would remain steady at about 10 percent of grossdomestic product through 2035 (see Figure 1). Population agingwill also affect the revenue side of the ledger, lowering payroll andincome tax collections, and perhaps making it less feasible to raisetax rates on earnings because discouraging work effort will be morecostly to society.1 For a detailed analysis, see National Research Council (2012). Aging and theMacroeconomy. Long-Term Implications of an Older Population. Committeeon the Long-Run Macro-Economic Effects of the Aging U.S. Population. Board onMathematical Sciences and their Applications, Division on Engineering and PhysicalSciences, and Committee on Population, Division of Behavioral and Social Sciencesand Education. Washington, DC: National Academies Press.