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Young Americans Face Bleak Tax Future
Experts have warned that taxes to fund essential retirement, disability and healthcare provisions like Social Security and Medicare are likely to grow in the coming decades due to ongoing changes in America’s workforce demographics. And the youngest generations, millennials and gen z, are likely to take on most of the burden.
Several key factors are to blame. According to the U.S. Chamber of Commerce, the U.S. workforce is “aging at an accelerated rate” thanks to historically low birth rates and migration levels, as well as the increasing retirement of the baby boomer generation. Coupled with longer life expectancies, those claiming Social Security retirement benefits will need more money to see them through their later years, much of which is likely to be made up with state benefits.
The U.S. workforce has been in steady decline since 2000, primarily due to the ongoing retirement of the baby boom generation, the youngest of which—those born between 1959 and 1965—will begin claiming retirement benefits this year.
Population growth is also expected to slow over the next 30 years, from 0.6 percent per year, on average, between 2024 and 2034 to 0.2 percent per year, on average, between 2045 and 2054. By 2054, the number of people claiming Social Security benefits is expected to increase by 2.4 percent—a faster growth rate than the population.
Peaking at 67.3 percent in 2000, the current labor participation rate, defined as the percentage of the population that is either working or actively looking for work, stands at 62.7 percent in 2024. This is expected to drop even further, with the U.S. Bureau of Labor Statistics projecting the rate to fall to 60.4 percent in 2032.
Exactly how much more today’s young Americans may be expected to foot is uncertain, but experts are united on the fact that it will be more. “The tax burden will be disproportionately greater on the younger generation because of the size of the retired population and the amount of people drawing on social retirement benefits,” Aaron Cirksena, founder and CEO of MDRN Capital, told Newsweek. “And without significant changes to the system, the long-term financial stability of these programs may be at risk for the younger generation as well.”
Experts explain that the results of an ever-depleting workforce will have a knock on tax effect for everyone, but particularly for America’s young. “This could manifest in various ways, including higher payroll taxes, increased income taxes, or changes to the structure of these programs to reduce benefits or raise the retirement age,” Cliff Ambrose, FRC, founder and wealth manager at Apex Wealth, told Newsweek.
The data also paints a bleak pictures. “There is a harsh math to our predicament that will leave us with difficult choices,” Stephen Kates, principal financial analyst for Annuity.org, told Newsweek. “The Congressional Budget Office reported earlier this year that the proportion of Americans ages 25 to 64 compared to age 65 or older will decrease from 2.9:1 to 2.2:1 by 2054. This means fewer dollars funding Social Security and Medicare entitlements. Pairing this with longer future life expectancies, funding challenges may become more acute.”
Kates explains that one or both of two avenues may need to be explored in order to guarantee there being enough funds to keep state benefits going. Payroll taxes funding Social Security will need to rise, either by eliminating existing caps, increasing the percentage of income, or both. If this doesn’t happen, payouts to retirees will decrease either through reduced monthly payments, the increase of the eligible retirement age for future retirees, or both.
As well as this, the Social Security Administration faces a twofold issue with its funding. Newsweek has previously reported on the major funding cliff faced by the government agency that if not resolved, could see benefits cut by a quarter in the next decade.
Another more controversial way to shore up the workforce, thus eliminating the need to increase taxes, is to encourage immigration, Kates explains, which would introduce more “prime age workers;” individuals aged between 25 to 54. However, an outlook on how immigration may affect future tax burdens is difficult to formulate due to it being a “complicated political topic and predicting long-term trends is impossible.”
Financial woes for young Americans don’t stop there. Ambrose explained “broader economic implications” are likely if the size of the workforce continues to shrink—and again, this will affect today’s youngest generations the most.
“A smaller workforce relative to the retired population could lead to slower economic growth, reduced productivity, and increased strains on healthcare and other social services,” he said. “Policymakers will need to grapple with these challenges and explore strategies to address the long-term fiscal sustainability of social safety net programs while ensuring intergenerational equity and economic prosperity.”
But changes are not guaranteed, notes Lawrence Sprung, financial author and founder of Mitlin Financial, who urges young people to prepare for higher taxes and potentially lowered benefit rates as they grow older.
“Those who are going to rely on Social Security to be there and support them in retirement the way it is available today are mistaken,” he explained to Newsweek. “I believe it is more important than ever for young workers to begin planning for their financial future early, right out of college if possible.”
“The system is being strained from many different angles, including longevity, the size of the worker pool decreasing over time, and simply a greater demand on the system than what is being put into it.”
Uncommon Knowledge
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
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