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Retiring Boomers to Hasten Search for New Tax Revenue
The retirement of members of the baby boom generation starting in the next five years will exert significant pressures on all levels of government and the services they provide, their spending priorities and their tax systems, according to a new study by Deloitte Research released on May 14.
According to the “Serving the Aging Citizen” study, before 1995, elderly residents exceeded 15% of the population in only five states. But by 2025, the elderly share will exceed 15% in every state but Alaska and California, and “as the number of elderly increases, and the percentage of individuals assuming the tax burden decreases, policymakers will need to determine how to allocate scarce resources across competing demands from various age groups,” the report says.
“As the population and work force ages, state and local governments will have to examine how the growing number of elderly will impact the design and mix of services they offer, the funding sources they rely upon and the delivery channels they use to make the services available to their citizens,” said Jessica Blume, national managing director, public sector and a principal of Deloitte Consulting LLP.
The increase in the number of elderly citizens will drive changes in the composition of government services. Demand for many services that cater to the elderly will rise, while with fewer school-age children, demand for education and youth and child welfare services in some states will fall.
The study finds that the shifting demographics will also force governments to rethink how they finance their services.
“The issue is that as the number of elderly increases, there will be a smaller percentage of workers to cover the bulk of the tax burden,” Deloitte says. “Given that income and payroll taxes can only be raised so much, state and local governments will have to find other ways of generating the revenue they need to fund public services.”
Researchers at Deloitte expect the search for revenue to increase the prominence of four trends:
- Governments will modernize their tax systems to reduce their dependence on property tax revenues. This means fewer exemptions that poke holes in the tax base and a shift away from narrow-based, “idiosyncratic” tax structures.
- The average retirement age will be extended, offsetting somewhat the erosion of tax revenues from income and payroll taxes.
- There will be greater emphasis on user fees, which entail charging fees directly to the users of public services. County governments in the future could receive nearly as much revenue from user fees as from property taxes.
- Public-private partnerships will grow, involving the emergence of a much bigger and more sophisticated nonprofit sector.
To read the study, click here (www.deloitte.com/us/agingcitizen).
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