home icon

Will the U.S. See a New Tax to Support Its Aging Population?

German politicians floated the idea of a tax on all workers over 25 to bolster benefits for the elderly, but America is another story

By Bob Rosenblatt | April 26, 2012
Contributor Photo

Bob Rosenblatt is a writer and editor specializing in aging issues. His blog, Helpwithaging.com, focuses on the finances of aging.

Europe is jittery about the challenge posed by the growing number of elderly people who are due to collect government benefits. In fact, German Chancellor Angela Merkel’s party recently drafted a special tax — called a “demographic reserve levy” — on the income of everyone over age 25 to help pay for the benefits. Merkel nixed that particular idea and is working on an alternative, but the debate may lead you to wonder: Could the German predicament happen here? Could we see a tax on younger workers to help pay for Social Security benefits for our growing 65+ population?
 
The answer to both questions: No. 
 
How Germany and the U.S. Differ

Simply put, Germany’s overall population is shrinking and ours is still growing. Germany ‘s population is expected to decline by two million by 2025, while the U.S. population will grow by 38 million. Unique among industrial nations, the U.S. has a birth rate high enough to assure a growing workforce. In addition, roughly 1.2 million immigrants arrive in America annuall, many becoming workers.
 
Although the population of older Americans is growing fast, the ranks of the workers who will pay taxes to fund Medicare and Social Security will keep rising, too.
 
America's Aging Population

We can expect the costs of elderly benefits to rise sharply because of the growth of the older population here, but the numbers show that this tab can be managed. There were roughly 40 million Americans 65 and older in 2010, when the country had a workforce of 185.9 million (people between 20 and 64). Looking out to 2050, which is as far as demographers will estimate, there will be 88.5 million Americans over 65, supported by a workforce of 237.5 million.
 
True, the proportion of the U.S. population drawing Medicare and Social Security will climb — from 13 percent today to about 20 percent by 2050. But the rising number of workers and expected productivity growth will prevent the transition to an older America from becoming a big problem.
 
As the U.S. population keeps growing, Germany’s and Japan’s will shrink. Other major nations such as France and the United Kingdom will barely expand. “The United States is the only developed economy whose aggregate size will nearly keep pace with that of the entire world’s economy,” according to The Graying of the Great Powers: Demography and Geopolitics in the 21st Century, a study by the Center for Strategic and International Studies.
 
Social Security Changes Ahead

With an expanding workforce, the U.S. should be able to keep its promises to its aging population. But some changes to Social Security do seem likely as a result.
 
In 1983, when Social Security last faced serious financial solvency issues, the problem was solved with a combination of revenue increases and benefit cuts. That’s when the age to receive full Social Security retirement benefits rose from 65 to 67 for people born after 1960.
 
A similar deal will have to be reached between now and 2036, when the Social Security trust fund is expected to run out of cash. At that point, according to projections, tax revenues based on current rates will be able to pay only 74 percent of the benefits promised under current law.
 
So Democrats and Republicans have another 24 years to stop squabbling and reach a bipartisan deal, as history suggests they will. It seems unlikely that younger workers alone will be asked to shore up Social Security, since there will be enough workers of all ages to help solve the retirement program's financing problem.