| Abstract: |
This paper uses micro-census income data from the Luxembourg Income Study
(LIS) to measure the current and future burden of financing public transfers,
especially benefits supporting the aged and near-aged. The analysis
distinguishes between income obtained from households' own saving and labor
earnings, on the one hand, and the part financed with unfunded transfers, on
the other. The burden of unfunded transfers is defined as the tax on factor
income that is needed to pay for such transfers under a balanced budget rule.
The paper develops a framework for estimating and forecasting this burden
using micro-census reports on the current age distribution of factor incomes,
the age distribution of transfer incomes, and U.S. Census Bureau projections
of the future age structure of the population. Because survey data are
inaccurate and incomplete, the micro-census income reports are adjusted to
reflect under-reporting based on estimates of aggregate income from the
national income and product accounts. Empirical estimates of current and
future tax burdens are derived for four OECD countries. These show that the
burden of German and U.S. transfers is unusually sensitive to the effects of
an aging population. In contrast, the burden of public transfers in Finland
and Britain is less sensitive to the effects of an older population because
transfers in those countries are less heavily tilted toward aged
beneficiaries. Factor incomes received by aged Americans are high by
international standards, providing a partial offset to the sharp tilt of U.S.
transfers in favor of the elderly. As the U.S. population grows older, factor
incomes will decline more gradually than is the case in other rich countries,
helping to maintain the size of its tax base. |