Paying for the Aging Population's Consumption in Today's Economy

Paying for the Aging Population's Consumption in Today's Economy

By kev_nag | kev_nag | 17 Jul 2021


***INTRODUCTION***

The timing of this article is fortuitous as it is occasioned by my 63rd birthday. That fact aside, I have retired from the work force and have been so retired for about a year now. I do consider myself very lucky. I am able to survive on my Social Security monthly payment together with a small amount of savings I was able to piece together following my divorce.

I may not have everything I want, but I do have everything I need. But realistically not all of today's aging population is not as lucky as I am. For many, it is a daily struggle for survival.

***HOW IS CONSUMPTION FOR THE AGING POPULATION PAID***

Today's aging population pays for it's consumption in four basic ways:

  • 1. Even though the aging population has retired from full time work, some may opt to continue to work in a limited way (career change, part-time employment). Some may even delay exiting the workforce due to the economic uncertainties that may present if they left.
  • 2. Some of the aging population may rely upon their saved assets for support and continuing consumption (this may include business continuation, farming operations, equity in real estate, savings and investments accumulated during the working years).
  • 3. A portion of the aging population may rely on net support received from younger family members who are still active in the work force. (Net support in this context means the amount the aging population receives from younger relatives minus the amount of support the aging population provides for younger family members).
  • 4. A large component of monies available to pay for the aging population's consumption comes from the government through periodic payments of cash as well as in-kind governmental provisions for health care, food benefits, and the like. This component is funded through taxation with the tax burden falling on the working age population.

For four demographic areas (Asia, Europe, Latin America, and the United States) payment for consumption by the aging population may be graphically shown as follows:

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As a generalization, the greater the contribution toward consumption the aging population makes on its own behalf, the lesser the burden falling on the working age population to provide for such consumption. And just how are these public transfers to pay for the aging's consumption funded and what burden falls upon the working age population? ***TAXES***

In the Graph shown above, the European area is worthy of note as to its high degree of public transfers to fund the aging population's consumption. When the population ages and the aging population contributes less to their own consumption needs, the high cost of this burden falls on younger family members and the working age population through cash contributions and higher taxes. While this situation is highly prevalent in Europe, it is less so in the United States and Asia.

Why are these public transfers such a major problem? The answer to this may be easily deduced. The public sector transfers from governments, even netting out the taxes paid into the system by the aging population, utilize a great portion of the total public sector budgets. In other words, these aging population consumption payments are expensive to the government. And as the aging population grows [whether considering either a static or reducing working age population (due to overall general population decreases)] these costs must either be passed on to the working age population in the form of higher taxes, or, to the aging population in the form of reduced public transfers (either in cash or in-kind).

In an article by the International Monetary Fund, this problem is noted:

An aging population and slower labor force growth affect economies in many ways—the growth of GDP slows, working-age people pay more to support the elderly, and public budgets strain under the burden of the higher total cost of health and retirement programs for old people.

[International Monetary Fund. "Cost of Aging FINANCE & DEVELOPMENT".  https://www.imf.org/external/pubs/ft/fandd/2017/03/lee.htm. (Accessed July 15, 2021)].

In this article, a possible solution to the problems of burdening governments with this cost is advanced. The IMF suggests the use of 'Fiscal Support Ratios' to address the problem of paying for the aging population's consumption. Basically, "[t]hey are constructed like support ratios, except they relate taxpayers to beneficiaries rather than workers to consumers." [Id.]. In using the United States as an example:

...the fiscal support ratio will drop 11 percent between 2010 and 2050 from population aging. This means that to balance tax revenues and expenditures in the public budget (federal, state, and local combined) in 2050, tax revenues will have to be 11 percent higher or expenditures 11 percent lower, or some combination of the two, just to offset the increased costs from the aging population.

[Id.].

At present it is clear from the standpoint of necessity, that some governments have already begun to address the arduous task of restructuring public sector transfers to the aging population for consumption. From a purely political stance, however, this is indeed a most difficult and unpopular task. Suggestions being bantered about include raising the age of retirement for the aging population keeping them in the work force (and presumably self supporting) longer. Also, associating the sums of public transfers to available tax revenues is being discussed.

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***CONCLUSION***

As the aging population continues to grow, governmental concerns must turn to finding solutions to the funding of public transfers to maintain these consumption related costs. There simply is no easy solution for this problem at present.


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kev_nag
kev_nag

Just an ordinary casual crypto investor.


kev_nag
kev_nag

Retired, finally. I enjoy learning about crypto and sharing my discoveries. Also, I follow the News closely and enjoy discussing current events. I have no political agenda, but advance views based in reality with a slant toward real world consequences.

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