The Importance of Economic Growth
Table of Contents
Part of the solution is already being provided by older people themselves…a smaller percentage are entering nursing homes, more are continuing to save into their retirement years, and more continue to be working taxpayers after they reach traditional retirement age.
Economic growth plays a critical role in the trend of entitlement spending. While we are not going to merely grow our way out of our fiscal problem, sustained economic growth through strong investment in human and physical capital and productivity improvements can vastly alleviate the pressure for spending reductions or tax increases. One reason that economic growth is so critical is that entitlement spending is counter-cyclical, rising as a percent of GDP during economic downturns and declining relative to GDP during economic expansions.
Economic growth is also important because tax revenues will automatically grow faster than the economy because of "real bracket creep," where real growth (i.e., growth that exceeds the rate of inflation) causes some taxpayers to move into higher tax brackets, increasing income tax revenue. From 1975 until 2000, GDP (adjusted for inflation) grew at 2.57 percent per year, about the same as the 2.60 growth rate for entitlements. More important, during the same period, income tax revenues grew by 3.84 percent per year, almost 50 percent faster than entitlement spending, explaining why the budgetary pressure of entitlement spending has actually diminished in the past quarter century.