Oregon Office of Economic Analysis

Welcome back to the occasional series where our office will explore some of the demographic, economic, and societal impacts of an aging population. Previously we looked at overall demographic trends, and the generally improving health of retirees. Future posts are set to examine the impacts on housing markets, retirement homes, and some public policies. As always email me with your thoughts on the topic and other aspects to explore further. Today we dive into what the aging population means for personal income and public sector tax revenues, although the same trends will also be seen in sales of private sector businesses.

For the past decade, our office’s forecast has always included something along the lines of the following when discussing the extended outlook.

Longer term, revenue growth in Oregon and other states will face considerable downward pressure over the 10-year extended forecast horizon.  As the baby boom population cohort works less and spends less, traditional state tax instruments such as personal income taxes and general sales taxes will become less effective, and revenue growth will fail to match the pace seen in the past.

The key here is that the vast majority of people have less income in retirement than during their peak working years. Retirements in Oregon today are somewhere around the high water mark but will remain large in the decade ahead. This translates into a whole lot more Oregonians with relatively lower incomes who will spend less as well.

One key issue is that the composition of income also changes considerably. During one’s prime working years, wages account for 80-90% of income. In retirement, the combination of pensions, IRAs, investments, and social security account for 80-90% of income. Given that Social Security is not taxed in Oregon, we know that taxable income for retirees declines even further than overall income. Roughly speaking, Oregonians in their 70s have incomes that are around 30% lower than Oregonians in their prime-working and peak-earning years. However if you exclude Social Security, a rough estimate of taxable incomes are more like 50% lower.

Now, it’s important to point out that Oregon tax collections will continue to grow. Tax liability among retirement income is forecasted to more than double in the decade ahead. However, the demographic impacts here do act as a headwind on overall growth. Retirees have lower incomes, and we will see considerably more retirees in the years ahead. Oregon, unlike many states in the Northeast or Midwest, continues to see net in-migration among working-age households, which buoy the regional economy and will drive income growth and tax collections.

Speaking of retirement and incomes, we know that both incomes and wealth are particularly concentrated. Our office previous looked at capital gains, but there is also an age component here. Even for those with a lot of wealth, much of it is generally earned or at least accumulated over one’s lifetime. Net worth for households 75 years and older is about three times that for those in their prime working-age years. For most households this wealth is home equity with a little bit of financial investments, but the higher up the distribution you go the real sums of wealth are not in housing but in investments and business equity. Given asset markets, Oregon’s strong economic growth, and demographics, estate tax collections continue to be quite strong locally.

For those a bit lower in the stratosphere, other sources of income and policies matter quite a bit. As we dug into before, transfer payments are a growing share of personal income across the state. In many of our rural communities, transfer payments already account for 1 in 3 dollars of income. Social Security in particular is a big reason why. It’s a little convoluted, but the next chart tries to show how important Social Security is for the vast majority of older Oregonians. Essentially, 1 in 3 seniors in the state rely entirely on Social Security; they have no other source of income in retirement. And Social Security accounts for more than half of all income for more than half of all seniors in the state.

The other key issue is that lower incomes in retirement also means less spending which directly translates into fewer sales for business and less tax collections. Overall consumer spending drops by about 25% in retirement relative to one’s prime working-age years. And the older one gets, the larger the drop. Spending is more like 40% lower in one’s 70s and 80s.

A complicating factor is that the composition of items purchased also changes. Older individuals spend a larger portion of their income on items like food, housing, and medical care, and considerably less on big ticket durable goods like cars, computers, and couches. The former are not generally subject to retail sales taxes, while the latter are. This shift in consumption, plus retail deflation are the major reasons why retail sales taxes have eroded in recent decades and are expected to continue to so in the years ahead.

This also highlights why it was important from a policy perspective that Oregon’s new corporate activity tax (CAT) applied to firms selling both physical goods and services, if they meet the threshold of $1 million in Oregon sales. Oregon’s CAT should not suffer the same structural fate as general retail sales taxes have.

Just as the demographic-related drop in income and spending impacts all non-health care sectors of the economy, it will also impact all of the different public sector revenue streams. This is not just a personal income or sales tax issue. Other Funds — which are not General Fund or Federal Funds — are also impacted considerably. This include things like licenses and fees (DMV, fishing, hunting, etc), gas taxes, college tuition, alcohol and tobacco sales, and the like. Consumer spending on all of these different items will continue to grow in the decade ahead due to economic gains and in-migration, but the underlying growth rates will be lower than previous periods due to the aging of the population. These changes will not occur overnight and are already here to a certain degree. However the demographic shifts will certainly continue to impact growth for at least the next decade.