RAPIDLY AGING POPULATION

The Demographic Timebomb: A Rapidly Aging Population

 

With record-high amounts of student debt, questionable job prospects, and too much avocado toast in their bellies, many millennials already feel like they are getting the short end of the stick.

But here’s another economic headwind they face as they are coming of age: the percentage of the global population that is 65 or older will double from 10% to 20% by 2050.

As millennials enter their peak earning years, there will be 1.6 billion elderly people on the planet.

Someone Has to Pay the Bill

The above infographic highlights how demographics are shifting as well as the economic challenges of a rapidly aging global population.

With an older population that works less, support and dependency ratios get out of whack.

After all, countries already spend trillions of dollars each year on healthcare and social security. These systems were designed a long time ago, and were not setup to work with so few people paying into the programs.

Which Countries Face Headwinds?

While most countries face similar obstacles with aging populations, for some the problem is more severe.

The Potential Support Ratio (PSR), a measure of amount of working people (15-64) for each person over 65+ in age, is anticipated to fall below 5.0 in countries like Japan, Italy, Germany, Canada, France, and the United Kingdom. These countries will all have significant portions of their populations (>30%) made up of elderly people by 2050.

The United States sits in a slightly better situation with 27.9% of its population expected to hit 65 or higher by the same year – however, this is still analogous to modern-day Germany (which sits at 27.6%).

Elderly Dependence Rates

 

Will millennials be able to diffuse the demographic timebomb, or will an aging population be the final straw?

Donald Trump isn’t the only septuagenarian unwilling to ease into a traditional retirement. As they near the end of what’s traditionally been the working years, today’s Baby Boomers are entering into retirements that look a lot different than those of their parents. Thanks to increased longevity, retirement today is longer and more expensive than ever before, and it also very often includes some kind of work.

More than 70 percent of workers over the age of 50 say that their ideal retirement now includes working, and nearly half of current retirees say that they have worked or plan to work in retirement.

Eight in 10 of those surveyed say that they’re doing so because they want to, not because they have to, and they’re more likely to work part-time or volunteer. More than 60 percent of those who work in retirement do so because they want to work or stay mentally active, and 46 percent work in order to remain physically active.

While a working retirement may differ from the older dream of retirement, it’s not necessarily a bad thing. Retirees who work report more satisfaction and less stress about finances than their peers who have quit the workforce entirely. The most successful among them are able to find jobs in retirement that not only meet their financial needs, but are also meaningful in other ways and offer scheduling flexibility.

Many workers heading into retirement are woefully unprepared financially and have no idea of the tax impacts of taking on a part-time job to ease the fiscal pain, researchers warn. 

Any of the Baby Boomers retiring every day who are contemplating a second job in their retirement may want to reconsider, due to an unfamiliar network of federal and state taxes that can serve as significant work disincentives.

Prospective retirees can forget the Social Security Administration-provided benefit calculations that come in the mail. They’re completely meaningless. They simply don’t factor in the implicit and explicit taxes that those ages 50 through 79 face from the offsets between income, age, and benefits.

There is a need for much more transparency in the nation’s retirement and fiscal systems. The Social Security Administration could provide the information, but likely needs a push to do so by someone in government who thinks it’s important. That someone could be in the presidential administration or in Congress.

Working longer, say an extra five years, can raise older workers’ sustainable living standards. Taking a second job to supplement income during retirement can prove costly. But the impact is far smaller than suggested, in large part due to high net taxation of labor earnings. Many boomers now face or will face extremely high work disincentives arising from the hodgepodge and uncoordinated design of the nation’s fiscal system.

Older workers typically face high, very high or remarkably high marginal net taxation on their extra earnings. Work disincentives are highest for those at the bottom and top levels of resource distribution.

Don’t let the door hit you. Uncle Sam is, indeed, inducing the elderly to retire. Of particular concern is Medicaid and Social Security’s complex earnings test and clawback of disability benefits. A clawback is the recovery of funds disbursed by a company, pension, or government. But an open question is the extent to which the elderly correctly perceive these disincentives. Indeed, it’s hard to believe that policymakers, themselves, are cognizant of the level and spread of the work disincentives they are imposing on the elderly.

The marginal net tax rate linked to a significant increase in retirement earnings, such as $20,000 a year from a part-time job, can for many elderly be dramatically higher than that associated with earning a relatively small, say $1,000 a year, extra amount of money. Many baby boomers face fairly grim financial realities in retirement, and more government transparency around taxes and benefits is needed to help them assess their futures. 

For the 20 percent of the population aged 50 to 79 with the lowest incomes, earning an extra $1,000 raises a household’s expected value of lifetime spending by just around $700, which translates into a 30 percent marginal net tax rate. Even an extra $10,000 of lifetime earnings means another roughly $6,000 in lifetime spending, and a 40 percent remaining lifetime net tax rate on those additional earnings.

Other financial tradeoffs or exchanges include:

  • Medicare income limits, Social Security earnings test limits for those retiring before the current full retirement age of 66 and Social Security income tax thresholds.
  • Increased premiums for Medicare Part B for retirees earning more money.
  • Rising out-of-pocket healthcare costs through higher premiums, higher Medicare Part B co-payments and outpatient care not covered by Part B, as well as projected increases in prescription drug expenses.
  • Implicit taxes linked to government benefits such as food stamps.

All this is set against a backdrop of an already grim financial picture for many baby boomers’ golden years. Only 67 percent of them have any retirement account, and many of those have very low balances. Forty percent of boomers have no retirement savings at all.

While Social Security was designed as a basic floor for retirees’ living standards, it actually provides at last 90 percent of more than a third of elderly households’ income. Nearly two-thirds of older households rely on Social Security for at least half of their income.

Meanwhile, prospects of increased Social Security benefits to help boomers are dim. Social Security already is 32.2 percent underfunded.

 

THE LAST YEARS OF MY LIFE

By Basil Venitis

 

Gone are all the power years

Avoid now any strife

Shifting now slow gears

The last years of my life.

 

Life is a real game

Peace and prayer are now rife

Have accomplished my aim

The last years of my life.

 

Euthanasia is coming

Marching now with a fife

Thank you much for all the hugging

The last years of my life.

 

All alone and no wife

Looking back at my life

Wondering about afterlife

The last years of my life.

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