Productive Seniors Disturb Long term Fiscal Stability

By TJ Kim

October 2, 2012

With the stagnant unemployment rate above 8%, U.S. economy observes a distinguished trend from the age distribution of employment. For the past years, there has been a rise in labor participation among workers over 65 while the labor participation among younger generation has contracted.

Citi economist, Steven C. Wieting, in Citi’s report, “Long-Term U.S. Budget: Absurd Dependence on the Young”, Wieting provided the following:

“The lack of need to provide healthcare benefits coverage for 65+ aged workers – given their access to federally-provided Medicare – may be one cause of the stronger hiring trend for the group. In particular, small businesses that might not provide health insurance coverage could potentially skirt a future requirement to do so or lower their future liabilities by hiring workers with this existing coverage.”

Due to more senior workers participating in labor market, already slim opportunities for younger generations have become more limited. Especially, this trend hit the age group of 35-44 hardest. Historically, income rise for the age cohort of 35-44 has been greatest, compared to other age groups in income distribution across age groups. However, recent decline in labor participation from this age cohort put a downward pressure in overall U.S. wage growth.

“a persistence of weak employment among the relatively young may portend a trend slowing in U.S. wage growth, all else constant. This would come as the newly employed fail to earn as much as the newly retired, if not in absolute terms, then compared to past replacement trends. The most important driver would be an impairment of human capital as the productivity of experienced workers is higher than for inexperienced workers.”

Therefore, declining in both wage and employment for younger age groups may emerge as a key detractor in long term tax revenue, and consequently deepen the structural U.S. budge deficit. Structurally, the U.S. government tax revenues relied more heavily on labor income to finance entitlement programs. While those in need of entitlement programs expand their population, with the reduction of wage gains in the younger workers, financing of entitlement programs may become more difficult moving forward.

“Workers moving into this age category have historically seen the largest step up in lifetime income, a potentially lingering impact given wage “stickiness”…. we are concerned with the long-term social costs of structural unemployment for younger cohorts given their potential failure to build private savings for retirement. It could also generate a lasting shortfall in tax revenues counted on in “pay as you go” entitlement programs covering the pensions and healthcare costs of older workers…Aside from the truly unusual degree of relative healthcare price inflation in the U.S., the pending surge of beneficiaries relative to payers for these entitlements drives a large share of the structural U.S. budget deficit.”

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