Mobile Edition
Print
Get the Mag
Weekly Updates[ILLUSTRATION OMITTED]
Introduction
Montana will become much older in coming decades as the "Baby Boom" generation reaches traditional retirement age. Changing demographics will affect state and local government budgets in a variety of ways. On the revenue side, income taxes may fall as Baby Boomers retire. On the expenditure side, state and local governments pay for a variety of services for the elderly, including some health care and nursing homes. Expenditures on these programs are likely to increase as the elderly population grows. On the other hand, expenditures that are focused on younger age groups, such as education and corrections, may fall. Prudent policymaking should consider projected demographic changes and their impacts on budgetary issues.
This article describes how Montana is expected to age An coming decades and begins the process of analyzing the fiscal impacts by considering Medicaid expenditures for the elderly. The relationships among age and selected taxes are also examined. Much more analysis could be done; some topics for future research are described in the concluding section.
Figure 1 divides Montana's population into three groups by years of age: 0-17, 18-64, and 65-plus. Most members of the youngest age group ("youth") are not economically active because they are at home or in school. The middle group is sometimes referred to as "working age," although some of the youngest and oldest members of this group may still be in school or on early retirement. People in the oldest group ("elderly") are mostly retired. Although these divisions are not perfect, they provide an objective way of describing changes in the age composition of the population.
Figure 1 tells a simple but compelling story: the percentage of the Montana population that is elderly doubled between 1940 and 2000 and is projected to double again by 2030. The elderly population is growing for several reasons: First, people are simply living longer. Between 1940 and 2005, life expectancy at age 65 increased from 13 years to 19 years. (1) Second, the Baby Boomers, born between 1946 and 1964, are currently nearing retirement age and will swell the ranks of the elderly in coming decades. Another reason that the elderly are a growing fraction of the population is that birth rates have declined: As fewer children are born, they make up a smaller percentage of the total population. Finally, young adults ages 20-29 have been migrating out of Montana for some years. These trends are affecting other states as well, but they are especially strong here: By 2030, Montana is projected to have the fifth highest percentage of population aged 65-plus. (2)
The youth and elderly populations are economically dependent on the working age population. Youth are dependent on their parents for food, clothing, shelter, etc., and public schools and other services for youth are financed by taxes that fall on the working age and--to a lesser degree--elderly populations. Most retirees save relatively little on their own and instead depend on Social Security, Medicare, and other benefits that are largely financed by taxes on workers. Many elderly also rely on their children for time, money, and care. The ability of the working age population to support both youth and elderly depends on how many dependents there are for each working age person. The ratio of youth to the working age population--the youth dependency ratio--measures the number of youth for each person of working age. The ratio of elderly to working age population--the elderly dependency ratio--measures the number of elderly for each person of working age. The total dependency ratio is the sum of the youth and elderly dependency ratios.
[ILLUSTRATION OMITTED]
[FIGURE 2 OMITTED]
Youth, elderly, and total dependency ratios are displayed in Figure 2. The elderly dependency ratio has risen steadily since 1930 and is projected to rise steeply over the next few decades. Currently there are about five people of working age for each elderly person; projections suggest that there will be only two people of working age for each elderly person by 2030. The youth dependency ratio was high in the 1950s to 1970s when the Baby Boomers were young but has declined to historically low levels in recent years. It is expected to increase only moderately by 2030, when there will be about three working age people for each youth. The total dependency ratio reflects both of these trends: It peaked around 1960, is expected to decline to the 1940 level by 2010, and then will rise sharply by 2030. Put differently, by 2030 there will be about 1.2 persons of working age for each youth or elderly person. However, only about 78 percent of the working age population are in the labor force, so there will be less than one worker for each dependent person. (3)
[FIGURE 3 OMITTED]
[FIGURE 4 OMITTED]
Growth in the elderly population will differ substantially across Montana. Figures 3 and 4 display county-level data on the percentage elderly in 2000 and projected for 2030. Lighter colors on these maps indicate lower elderly dependency ratios, and darker colors indicate higher dependency ratios.
Forty six of Montana's 56 counties are projected to have elderly dependency ratios of 40 percent or higher, and 28 counties will exceed 50 percent. The only exceptions arc counties that have large university or American Indian populations.
Fiscal Impacts
The changing age distribution of the population is likely to have significant impacts on both the revenue and expenditure sides of government budgets. At the federal level, aging of the population will greatly increase the cost of Social Security and Medicare--the American health program for the elderly. (4) A separate program, Medicaid, provides health care for low-income people of all ages, including the elderly, and is jointly financed by the federal and state governments.
As Table 1 indicates, $162 million or about 24 percent of Medicaid expenditures in Montana in 2005 provided nursing home and other health care services for the elderly. Expenditures on services for the non elderly totaled $513 million. The elderly are about twice as expensive as the non-elderly on a per capita basis.
The right side of the table projects Medicaid expenditures in 2030, assuming that nothing changes except Montana's population. The number of elderly more than doubles by 2030, so the projected expenditure on the elderly rises as well. The number of non-elderly Montanans is projected to decline, so the projected expenditure on the non-elderly falls. Total expenditure and average expenditure per person rise, because the growth in the relatively expensive elderly population outweighs the savings from fewer non-elderly. The bottom line is that projected changes in the age distribution of the population can be expected to increase Medicaid costs by about 23 percent. The fraction spent on the elderly increases from 24 percent to 41 percent.
The projection in Table 1 is almost certainly too low, because health care costs are expected to continue to rise faster than incomes and general price inflation. (5) Montana's share of the costs may rise as well: Currently, the federal government pays for approximately 72 percent of Medicaid expenditures in Montana, with the state paying the remaining 28 percent. Federal budget pressures are likely to increase in coming decades because of Social Security and Medicare, and one result may be that more of the costs of Medicaid will be shifted to the states.
Aging and Tax Revenue
Aging of the population will also affect the revenue side of government budgets in Montana. One avenue of influence is the state's personal income tax, which accounts for about 25 percent of total state and local government tax revenue. Individual income tax payments vary dramatically over the life cycle, both because income itself has such a strong life cycle pattern and because a progressive income tax structure garners most of its revenue from people during their highest earning years. For example, average pretax incomes of persons aged 55-64 are about twice as high as those aged 25-34, and then decline sharply in the retirement years. The average income of persons aged 75-plus is only slightly more than those aged 25-34, and some forms of retirement income are given preferential treatment under state and federal tax codes. (6)
Figure 5 displays federal personal income tax payments per person according to the age of the head of household. Montana income taxes are likely to exhibit a similar pattern but at a lower level. A typical household with a head 25-34 years of age pays $1,751 per person in federal income taxes. This amount increases almost four-fold to $6,679 per person by age 55-64, before declining to $1,204 per person by age 75 plus.
The aging of the population is likely to reduce income tax revenues per person because the Baby Boom generation is currently in or near its peak earning and tax-paying years (45-64) but will move into retirement in coming decades. The oldest Baby Boomers, for example, reach age 62 in 2008, while the youngest reach age 44. By 2030, the oldest surviving boomers will be 84, and the youngest will be 66.
In contrast, residential property tax revenues appear less likely to decline as the population ages. Figure 6 displays average residential property tax payments per person by homeowners. (7) Although residential property taxes peak at ages 55-64, they decline only moderately at older ages.
[FIGURE 5 OMITTED]
Summary, Conclusions, Caveats
Aging of the population may put significant pressure on federal, state and local government budgets in coming decades. Expenditures on the elderly are likely to rise, especially for health care. Aging will reduce income taxes as Baby Boomers reach retirement age. Aging will also have large impacts in the private sector. For example, the number of beds in nursing homes and assisted living facilities, many of which are provided privately, will need to double by 2030.
FEED