the dramatic widening of the gap in life expectancies across the income distribution seen in recent decades (Congressional Budget Office, 2008), this distributional effect might be deemed undesirable. On the other hand, if changing the retirement age—particularly the age of early retirement—could induce workers to stay in the labor force longer, this could offset the effect of the reduction in benefits on income and would also provide a greater boost to economic activity than a benefit cut for all retirees. But, those with shorter life expectancies may also have less capacity for work (Cutler, Meara, and Richards-Shubik, 2011). Other possible policies might also face some trade-offs between efficiency and equity. For example, a policy to further means-test benefits might have favorable distributional consequences but would also impose greater implicit taxes on saving.

Tax Increases

Many observers believe that increased tax revenues will be necessary to meet the fiscal challenge posed by population aging. From a macroeconomic standpoint, the particular details of the tax changes are quite important. For example, simply raising tax rates on the existing tax base could have significant disincentive effects on labor force participation as well as on saving, making the required adjustments to the fiscal challenge of aging that much more difficult. On the other hand, many economists believe that reforming the tax code by broadening the base could lead to higher revenues while lowering marginal tax rates. This type of policy could help address the fiscal imbalance while also boosting economic activity.


A sizable share of the consumption of the elderly is financed by the government, in the form of Social Security, Medicare, and Medicaid. The projected changes in the population’s age distribution will create imbalances in these programs and, even under the most optimistic projections, lead to progressively larger budget deficits. The challenges of population aging are made more difficult by rapidly growing health costs and by the underlying structural budget deficits that federal and state and local governments face even in the absence of demographic change. Although government debt can grow faster than the economy for a time, policy changes that increase revenues and/or lower expenditures are inevitable in the next few decades. Analyzing the macroeconomic effects of the potential policy changes requires a consideration of their likely impact on private behavior, which will depend on their timing, their distribution, and their effects on the marginal incentives to work and to invest. To the extent that spending can be reduced and revenues increased in ways that increase economic efficiency, the macroeconomic consequences of the necessary policy changes would be muted.

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