The country is aging. Numbers of dependent retirees have grown absolutely and as a proportion of the population, and they will continue to do so, trends that will dampen the pace of economic growth and strain financial markets. Fortunately, the extensive research in a new book, Thirty Tomorrows, demonstrates that the country has means to mitigate these ill effects, protect its financial stability and sustain its prosperity. This and my next three columns will explain these matters and the changes dealing with them will elicit.
Two inescapable trends lie at the root of the problem. First, the long drop in fertility rates since the 1960s, to barely replacement levels today, will continue to slow the flow of young people into the workforce for some time to come. Second, increases in public health and tremendous advances in medical science have so increased life expectancies (about 8 percent in the last 30-some years) that the average time spent in retirement has extended disappointingly. As these trends raise the proportions of dependent retirees in the population and lower the proportions of working-age people, the number of working age available to support each retiree will fall from 5.2 presently, according to the Census Bureau, to merely 3.0 by 2030. Even in this highly productive, high-wage economy, those three workers will face difficulty producing for and financing themselves, their personal dependents, and one-third of a retiree.
The implicit burden on Social Security and Medicare is obvious. Too few will contribute to maintain benefits as currently structured. Insolvency threatens. But this is only part of the developing problem. Because of the relative shortage of wage earners, private savings too will likely fall short of the flows needed to support both corporate and civil service pensions, as well as their associated medical insurance plans. The nation’s finances will face still more strain as the disproportionally large population of retirees draws on their personal savings and investments, undermining longer-term prospects in financial markets, and so the expectations of gains that underlie private as well as public pension plans.
If the economy could produce enough added wealth, it might avoid these financial strains, but as it is, these demographic imperatives also threaten the pace of economic growth. At the most broad-brush level, the relative shortage of workers will tend to limit the economy’s productive power, including its ability to provide for the consumption and other economic needs of these retirees. In the face today’s huge army of unemployed, it may be hard to envision a time when such a relative labor shortage exists, but it is important to realize that these are long-term trends that will persist after today’s cyclically high unemployment, stubborn as it is, has disappeared. At the same time, the relative labor shortage will raise wages, which, though a benefit to workers, will also cut profits as much as 10 percent, according to some studies, and so starve firms of the means with which to improve productivity and increase their productive capacities generally. Combined, these effects, in the absence of remedial action, could slow the economy’s real growth rate by a fifth or more.
In the face of such pressure, it is little wonder that many commentators have adopted a pessimistic tone. Harry Dent has written entire book of gloom and doom. Much in the media has echoed this downbeat assessment. An item from the San Francisco Chronicle illustrates the mood, describing a “self-centered generation [of elders] just sucking down all the economic resources.” Peter Peterson, secretary of commerce under Richard Nixon, head of the Peterson Institute, and a man never accused of optimism, argued that “aging could trigger a crisis that engulfs the world economics [and] may threaten democracy itself.”
Such doom saying, however consistent it is with aspects of the country’s demographics, misses a crucial point. People will not simply stand by passively and allow their prosperity to disappear, whatever the pressure. They will cast about for means to supplement the availability of productive, tax-paying, pension-contributing workers and make whatever changes are necessary to leverage those means. Such efforts will keep older workers on the job longer. They will make accommodations to increase women’s participation in paid work and to raise rates of immigration. Remedial action will also increase trade and globalization. Subsequent pieces in this space will elaborate on the nature of each of those remedies and the changes they will require.