Much has been made of the pressure that the coming wave of retiring Baby Boomers will place on the federal budget. For many years, soi-disant fiscal conservatives and “responsible” pundits have been preaching that the costs of providing Social Security and Medicare to the burgeoning number of elderly Americans will “bankrupt” the government and require drastic cuts in these programs. None of these Cassandras, however, ever seem to take note of the bright side of the Baby Boomer retirement on federal revenues. Income and consequently taxes from retirement sources have been growing much faster than that from other areas, and will provide substantial support to federal revenues as IRA, pension, and Social Security payments march higher.
In previous commentaries we have been scornful of the notion that Social Security is a budget buster, but we had not outlined the benefit which will result from increased IRA and pension distributions. In fact, when the retirement system is viewed as a whole, we can even say that the taxation from the private retirement vehicles will more than make up for the increased costs of Social Security. The tax deferral quite sensibly practiced by many Americans in their IRA’s and 401K’s will cushion the federal budget down the road. (We make no similar claims for the health care programs Medicare and Medicaid which are projected to become ever larger draws on the federal government. However, if we could figure out a way to bring our medical costs per capita in line with the rest of the developed world, this pressure on the budget would be largely eliminated as well. In my opinion, dealing with the aging Baby Boomers really requires that the administration and Congress focus on reducing health care costs—we will leave the likelihood of this to the reader’s own estimation.)
According to IRS data, the current average income tax rate on all income is roughly 15% (note that this does not include payroll taxes). While it is impossible to assign a tax rate to specific sectors of income, we can estimate the average percentage on retirement income by comparing the Social Security Administration’s estimate for revenue from Social Security payments with the IRS’s data on taxable Social Security. (That is, the SSA reports the money received from taxable Social Security distributions as income.) This ratio runs about 12% which seems reasonable since the average rate paid by retirees (who generally have lower incomes) should be slightly lower than that of the general population.
If we use a 12% average rate, the federal government’s take from private retirement sources was roughly $135 billion in 2014 (the most recent year for which IRS data is available.) At the current 6.7% rate of annual increase, retirees will be paying about $400 billion per year by the time that the Social Security “Trust Fund” is “depleted” in the early 2030’s, and will continue to far exceed the projected SS shortfall for the foreseeable future. If we view the retirement system as a whole, the revenue from tax-deferred retirement savings will not only meet the needs of the public retirement sources, will even result in a net plus for the federal budget. Far from dooming us to a ballooning deficit, the retirement of the Baby Boomers will actually be a boon to the budget under the current tax regime.
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