Defusing the baby boomer time bomb: projections of after-tax income in the twenty-first century.

Abstract

There has been a major national policy debate over the prospective tax burden facing future generations of workers as a result of the impending retirement of the baby boom generation. However, the real determinant of well-being is after-tax income, not the tax rate on before-tax income. This study constructs a series of projections of after-tax income, for workers and families at different points in the income distribution, to examine the effects of several different trends. The author first calculates the extent to which after-tax income can be expected to decline as the result of the aging of the baby boomers, then calculates the impact on after-tax income for families at different points in the income distribution of a continuation of recent trends in wage inequality. He also constructs a category of "after-tax, after-health-care spending" income, which examines the impact of the continued rapid growth in health care costs. The findings suggest that the continuation of recent trends in inequality and health care cost growth will have a much larger effect on future living standards than will the aging of the baby boomers.