As life expectancies increase, the population ages, and new medical technologies become available to help people live longer, economists and budget analysts predict that spending on federal retirement and health programs will grow extremely rapidly. Today, Social Security, Medicare, and Medicaid constitute approximately 10 percent of GDP. Experts estimate that in 2075 when children born today are in their retirement years spending on these programs will be approximately 22 percent of GDP. This is a larger share of GDP than all federal government spending today! How will our society cope with increased demands for these services?
One possibility is to leave the existing programs in place and just raise taxes to pay for them. This strategy would have two implications. First, if we maintained the federal share of GDP of all other programs, it would mean a large expansion of federal government spending, from 20 percent of GDP to 32 percent of GDP. Second, it would mean a very large increase in the tax burden on future workers and businesses.
Some economists suggest the government should save and invest now to increase GDP in the future, reducing the burden on future generations. However, the saving and investment would increase GDP, and entitlement payments would grow right along with it. As a result, the relative burden of taking care of the elderly would not change dramatically.
Another strategy is to try to reform the entitlement systems, placing more responsibility on individuals and families for their retirement and well-being. For example, we could increase the age at which retirement benefits begin to be paid, and thereby encourage individuals to spend more years in the labor force. Or we could try to reform the health-care system to encourage more competition to reduce healthcare expenditures.