Minnesota’s Long Term Fiscal Challenges

Tom Stinson, State Economist

Tom Gillaspy, State Demographer

December 2007

Minnesota Is at an Inflection Point

• Demographic changes, globalization and technological advances will alter

– Economic structure

– Infrastructure and social investment needs

– Entitlement and related spending

– Government resources

• Minnesota may need to prepare for change

Budget Priorities Will Change: More 65+ Than School Age by 2020

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1950 1960 1970 1980 1990 2000 2010 2020 2030

18-24

65+

5-17

Census counts & State Demographer projection

Budget Priorities Will Change: More 65+ Than School Age by 2020

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1950 1960 1970 1980 1990 2000 2010 2020 2030

18-24

65+

5-17

Census counts & State Demographer projection

Budget Priorities Will Change: More 65+ Than School Age by 2020

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1950 1960 1970 1980 1990 2000 2010 2020 2030

18-24

65+

5-17

Census counts & State Demographer projection

Budget Priorities Will Change: More 65+ Than School Age by 2020

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1950 1960 1970 1980 1990 2000 2010 2020 2030

18-24

65+

5-17

Census counts & State Demographer projection

State Taxes Paid by a Married Couple Before and After Retirement

Income Income Tax

Sales Tax

Total Change Pct

Working

$35,000 $1,236 $782 $2,018

$65,000 $3,387 $1,295 $4,682

Retired @ 70 %

$25,000 $0 $559 $559 -$1,459 -72%

$45,000 $1,091 $896 $1,987 -$2,695 -58%

Aging Is the Dominant Trend in Minnesota and the Nation

• It is not normal for a society to age

• Dramatic changes are coming over the next 4 years

• Sharp increase in retirements will begin in 2008

• In 2011, the number of 65th birthdays will increase substantially

From 2005 to 2015, fastest growth in Minnesota will be for ages 55 to 69

Projected change in number

16,2003,9006,700

44,50098,000

119,400107,200

55,500-43,400

-64,100-700

67,20051,800

-9,600-29,200

7,40049,100

37,600

85+80-8475-7970-7465-6960-6455-5950-5445-4940-4435-3930-3425-2920-2415-1910-14

5-90-4

Source: Minnesota State Demographic CenterNumbers are rounded

The Number of Workers Turning Age 62 Will Jump 30 Percent in 2008

0

10,000

20,000

30,000

40,000

50,000

60,000

7/05 to7/06

7/06 to7/07

7/07 to7/08

7/08 to7/09

7/09 to7/10

7/10 to7/11

7/11 to7/12

Year Turning Age 62

Wo

rke

d W

ith

in P

as

t 5

ye

ars

2005 ACS

Minnesota’s Dependency Ratio Is at a Record Low

47.7

57.8

76.169.4

53.3 54.550.7

47.3

54.8

64.3 64.9 65.4 66

0

10

20

30

40

50

60

70

80

90

Dep

enden

cy R

atio

Dependency Ratio= Number of children (0-14) plus number of elderly (65+)Divided by the population 15 to 64 time 100

The Proportion of Seniors Will Increase

0

10

20

30

40

50

60

70

80

1960 1970 1980 1990 2000 2010 2020 2030

Pe

r 1

00

Ag

e 1

5 t

o 6

4

Aged Dependency Youth Dependency

Under 15 and 65+ per 100 age 15 to 64

Aging of Society Will Impact Private and Public Spending

• Health care spending will increase

• Shift in government priorities to issues of aging and health

• Older voters often more fiscally conservative

• State tax base will be affected as baby boom reaches retirement age

Health Care Will Grow as a Proportion of GDP Through 2025

CBO Expects Medicaid Spending to Double by 2016, State Tax Revenues

Will Not Keep Up

0

50

100

150

200

250

2003 2005 2007 2009 2011 2013 2015 2017

Medicaid CostRevenue

Index, 2006 = 100

Aging is not the only concern

By 2020 Minnesota Will Add About ¾ Million People And 1/3 Million

Households

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

1970 1980 1990 2000 2006 2010 2020 2030

State Demographer projection revised 2007

Childless Couples And 1-person Households Projected To Grow

-24,500

29,000

-7,200

127,700

6,400

77,800

24,000

Married with Kids

Single Parents

Married No Kids,under 55

Married No Kids, 55+

Living Alone Under55

Living Alone, 55+

Other Households

Projected change, 2005 to 2015

Minnesota State Demographic Center projections

Upper Midwest Becoming More Diverse But Still Less Than The Nation

4%

6%

6%

9%

9%

24%

9%

14%

10%

13%

14%

34%

0% 10% 20% 30% 40%

Iowa

Minnesota

North Dakota

South Dakota

Wisconsin

United States

Percent Population of Color

2006

1990

Note: Population except white alone, not Hispanic, 2006 Census Bureau estimate

Minnesota’s Foreign-Born Population Increasing Since 1970

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

1950 1960 1970 1980 1990 2000 2006

Source: Census, 2006 ACS

Projected change in Minnesota income by type (preliminary results)

Assuming constant income by age and household type

8

6

15

24

12

4

36

65

Total

Earnings

Assets

Social Security

Projected Change in Income

2015-2035

2005-2015

Minnesota State Demographic Center

State Taxes Paid by a Married Couple Before and After Retirement

Income Income Tax

Sales Tax

Total Change Pct

Working

$35,000 $1,236 $782 $2,018

$65,000 $3,387 $1,295 $4,682

Retired @ 70 %

$25,000 $0 $559 $559 -$1,459 -72%

$45,000 $1,091 $896 $1,987 -$2,695 -58%

An Increasing Proportion of Consumption Goes for Services

Much of Minnesota’s Tax Base is More Volatile than GDP

-15

0

15

30

45

Wages GDP Cons Dur MotorVeh

BusEquip

CorpProfit

CapGains

Mean + / - Std Dev

Mean Growth Rate for Nominal GDP

Minnesota Has Been Very Successful (Especially For a Cold Weather State at the End

of the Road)

• Our economic growth rate has exceeded the national average

• Our population growth rate leads the frost belt

• We rank with the leaders on many social and economic indicators

Minnesota’s Current Success Is Due to Decisions Made 50+ Years Ago

• Private sector and public sector decisions established the foundation for growth in Minnesota’s economy

• Wise investments were made

• Dealing with challenges accompanying the baby boom was a key to our success