Boomer wave will require new priorities

01/22/2007

Minnesota must plan now for the day when retirees outnumber schoolchildren, experts said.


By Patricia Lopez,
Star Tribune
Last update: January 21, 2007 – 11:37 PM


Minnesota is on the verge of a big social change: Next year, the number of workers turning 62, the average retirement age, will jump 30 percent -- the first crest of an aging wave that eventually will force the state to rethink everything from how it collects taxes to how it pays for health care.

"That's a huge jump," said Tom Gillaspy, the state demographer. "You just don't see that kind of movement in demographics very often."

As Gov. Tim Pawlenty prepares to announce his budget priorities for the next two years today, Gillaspy and state economist Tom Stinson are sounding alarms about the next two decades and laying out a portrait of Minnesota 15 years from now that some will find unrecognizable.

Pawlenty's budget is unlikely to deal with those issues, in part because there's not enough detailed data yet. But there's a growing recognition among lawmakers that the window for making preparations will start closing soon.

Nearly three dozen DFL and GOP legislators have already formed a caucus focused on potential solutions to the dilemmas an aging population will present: What happens to a society when it has more retirees than schoolchildren? When tax revenue is still based on earned wages rather than accumulated wealth? When the biggest cost driver is no longer education, but long-term health care?

The same questions are arising across the country. By 2011, the millions of Americans born in the years following World War II will start turning 65, bringing workforce growth to historic lows as they become fully eligible for public and private pensions, Social Security, Medicare and other programs.

Three years after that, Medicaid spending -- much of which goes to seniors for long term care -- will start to significantly outpace state revenues, according to the Congressional Budget Office.

Seniority list

By 2020, Minnesota will have more senior citizens than children. Foreign-born immigrants will be the fastest growing part of the labor force, while the number of native-born workers will shrink.

That last point is particularly important for keeping the state's workforce strong, Stinson and Gillaspy say, because Minnesota schools now have some of the widest achievement gaps in the country between white students and those of color.

Already the number of white K-12 students in Minnesota has fallen by 51,000 in the past five years, partly replaced by 36,000 Hispanic, black and Asian students.

The Legislature's 2020 caucus was born at a breakfast last spring shared by Sen. Geoff Michel, R-Edina and Rep. Joe Atkins, DFL-South St. Paul.

"We want to shine a light on the out years," Michel said. "The Legislature tends to focus on nothing but the next election, on what's two, maybe four years out. We don't have the luxury of looking at things in two-year increments. If we don't put some reforms in place now, we'll either tax the next generation to death or cut benefits."

Michel and others in the 2020 group have zeroed in on a few big items: education, health care, pensions and a tax system that may be unsustainable in its current form.

A tax system that relies on wages can work -- but not when a majority of the population is living off accumulated wealth instead of weekly paychecks.

After retirement, Stinson said, income falls by about one third. But because of the progressivity of Minnesota's income tax and other special tax breaks for seniors, post-retirement tax liability can fall by as much as 70 percent.

"We're going to need a transparent system that counts income and wealth and makes it fair," said Senate Majority Leader Larry Pogemiller, DFL-Minneapolis, who previously chaired the Senate tax committee.

Pogemiller said he's "very concerned" about Stinson and Gillaspy's findings. "You look at it and think ... 'It's gut check time for baby boomers. Are we going to be selfish or are we going to leave this community better than we found it?' "

Workforce issues

Stinson said several key elements for Minnesota will be increasing productivity, attracting new workers and keeping at least some older citizens in the workforce.

That means closing the achievement gap in schools, more flexible working arrangements and possibly rethinking the higher tuition charged to out-of-state students.

"If we slow migration, our workforce will peak even earlier," Stinson said. As for tuition, he said, "We need to recruit high talent, not penalize them for choosing Minnesota."

Art Rolnick, senior vice president and director of research at the Federal Reserve Bank of Minneapolis, said that while he agrees with the Stinson and Gillaspy demographic findings, he has a slightly more optimistic outlook.

Sharp competition for fewer workers is likely to result in higher wages, he said, and will also serve to entice seniors back into the workplace. The market may well respond in other favorable ways, he said.

Gillaspy said he is more concerned about the distribution of that wealth in a generation known for its buy-first, save-later mindset.

A 2006 U.S. General Accounting Office study shows that the top 5 percent of boomers hold 52 percent of the wealth, he said. The bottom 50 percent control about 3percent. Half the population, Gillaspy said, has virtually no retirement savings.

Michel said his group has no "magic answers" for anything yet.

"I just know that in 2020 my 5-year-old will be in college. She's going to look at me and say 'Dad, you knew this was coming. What did you do about it?' "