The cost of providing medical and long-term care for low-income seniors is starting to squeeze state budgets, as the oldest baby boomers near their 80s.
Health care services for seniors now comprise about 60% of New York’s targeted Medicaid spending. Long-term care services comprised nearly 13% of Pennsylvania’s entire general fund budget last fiscal year. And spending on long-term care is rising in states such as Minnesota.
The U.S. population’s aging is too slow-moving to be called a crisis. But a shift to a society with fewer children, a smaller share of working-age adults, and a larger share of retirees has profound implications for state finances.
Lawmakers may need to cut or redesign school funding as enrollment shrinks. And they may need to cut spending on health care services offered to older residents or raise taxes to help pay for them.
“We’ve been talking about it for so very long that it almost seems not real,” Minnesota State Demographer Susan Brower said of demographic change. “But I think we’re now at the cusp where baby boomers are really moving into those older, older ages, and that’s where we’ll really see the impact on public budgets.”
Demographic change loomed over two of New York’s biggest budget fights this year.
Gov. Kathy Hochul (D) proposed cutting funding for shrinking school districts and long-term care services. Lawmakers balked, voting instead to study school funding changes and tax Medicaid managed care organizations to raise more money.
Both policy debates will be back on the table next year when lawmakers grapple with a structural deficit. State budget officials expect New York’s Medicaid spending this fiscal year to be 11% higher than last year, due to higher-than-expected enrollments, higher reimbursement rates, and more people using long-term care services.
Similar fights are coming to states across the country as the share of elderly residents increases. The oldest baby boomers turn 80 in 2026. By 2030, the entire generation will have reached retirement age. By 2034, the U.S. Census Bureau projects, adults over age 65 will outnumber children in the U.S. for the first time.
Some states are aging faster than others. At least 19% of people living in Delaware, Florida, Hawaii, Maine, Montana, New Hampshire, Pennsylvania, Vermont and West Virginia were 65 or older in 2021, Census estimates. Alaska, California, Colorado, Georgia, Texas and Utah had the youngest populations, with fewer than 16% of residents at retirement age or older.
Having a large population of older adults isn’t necessarily bad for state budgets. Florida has benefited in recent years from an influx of boomers seeking fun in the sun.
“We have done so well from the baby boomers that have been moving into the state since 2011,” Amy Baker, head of the state’s Office of Economic and Demographic Research, told lawmakers earlier this year. “It’s really colored our sales tax collections in particular, because a lot of them move into Florida, they buy their own home, they pay cash, they outfit it, equip it.”
But Baker cautioned that as boomers head into their eighties and nineties, they’ll contribute less to sales tax collections and put more strain on public services. Florida does not tax personal income; it relies on sales taxes on goods to fund state government.
“As they reach 85 and older, they’re not going to be making those purchases of goods,” Baker said. “They’re not buying a new car. They’re not redoing, necessarily, their living room. They become focused on services, which we don’t tax.”
Most states that tax incomes exempt some retirement income, such as Social Security benefits. Pennsylvania does not tax retirement income — such as 401(k) disbursements, pensions, Social Security — at all.
Pennsylvania’s tax structure suggests that in the years to come, taxes may need to rise on working adults to support services for retirees, the state’s Independent Fiscal Office said in its latest long-run budget forecast.
Managing spending on long-term care services provided by Medicaid, the health insurance program for low-income people jointly funded by states and the federal government, will be a challenge as more people reach older ages and become more frail.
People with physical and cognitive disabilities who receive long-term care services comprise about 6% of Medicaid enrollment nationally but account for 37% of federal and state spending through the program, according to KFF, a health policy nonprofit.
Federal rules require state Medicaid programs to cover nursing home care and home health services. But states have a lot of flexibility to determine who is eligible for long-term care and whether to add services such as help with daily tasks and meal delivery. Some blue states, such as New York, have also raised minimum wages for home care workers.
“States have to operate within fairly broad federal rules,” said Priya Chidambaram, a senior policy manager with KFF, “but they do have a lot of discretion when it comes to establishing these policies.”
State policy decisions help explain why Medicaid spending on long-term care services and on seniors varies widely from state to state. North Dakota spent $31,239 per senior enrolled in Medicaid in 2021, according to KFF, while Tennessee spent only $5,952.
Not all states track long-term care spending though Medicaid, or make long-run revenue and spending projections. But those that do have identified spending on long-term care as a key cost driver.
It’s the fastest-growing general fund expenditure in Pennsylvania, according to the Independent Fiscal Office. Spending on the state’s long-term living program for seniors grew by an average of more than 15% a year from Fiscal Year 2019 to 2024.
Analysts project it will grow a further 6% a year through FY 2029. That year, they estimate enrollment will reach 172,200 people, almost twice the number enrolled a decade earlier.
Pennsylvania is just reaching the point where its aging residents need more health care services, said Karen Maynard, a fiscal analyst for the Independent Fiscal Office. “Demographics does move slowly, until it doesn’t.”