Understanding the Demographic Challenge

Demography is destiny.
Widely attributed to Auguste Comte,
                                                                     19th century French philosopher

Prediction is very difficult, especially if it is about the future.
Widely attributed to Yogi Berra,
                                                  Hall of Fame Catcher;
                                                         Actually said by Nils Bohr,
                                                               Noble Prize winning physicist

Just about everyone makes reference to the looming demographic challenge to the U.S. economy and the federal government’s finances.  Many people seem to be unaware of some of the subtleties that surround our demographics.  Here is a brief discussion to explain just what we are up against.

The Long-Term Trends

For decades, demographic developments have predictably and gradually made our economic and budget outlook more difficult.

Child bearing.  Eons ago, when many families engaged in subsistence agriculture, children were the family enterprise’s workforce.  More children meant greater economic security.

Over time, that regularity changed.  With the transition from subsistence farming to industrialization and the current information age, not to mention the demands of education, children ceased to be a household labor force and gradually became much more of an expensive investment.  At the same time, women became more likely to be involved in market work outside the home, which made child rearing more difficult, and couples gained easier access to contraception.  As a result, there has been a clear long-term trend toward reduced child bearing (see the chart below, which will be discussed in greater detail later).

 

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That trend suits the economic and lifestyle needs of the family, but it poses a problem for the economy as a whole.  With reduced child bearing, the flow of new entrants to the aggregate labor force gradually declines (relative to the size of the total population, not necessarily in aggregate – and abstracting from any changes in immigration).  That tends to be a drag on the total production of the economy, and therefore on average living standards.

Predicting the outlook for child bearing in the future is difficult, as the words of Nils Bohr would indicate.  (And those words do sound different coming from a Nobel Prize winning physicist than they do attributed to Yogi.)  There are signs that the change in child bearing is not totally a reduction, but at least partly a postponement (though the effects of the two are not totally different).  Data on the labor force participation of women show a topping out of what was a fairly consistent growth trend from the World War II years through perhaps the 1990s, leveling off at about 15 percentage points below that of men.  Thus, the downward trend of child bearing might slow or end (as implied in the projections in the chart above).  There is also a regularity that child bearing tends to decline in bad economic times, and a recovery in the coming years might see at least some increase.  Still, the level of child bearing is below that of past decades, and seems unlikely to increase by very much.

Mortality.  While rates of child bearing have declined, expected lifetimes have increased.  Simple improvements in public health – like sanitation – probably have had the greatest positive impact over the decades.  Improvements in the availability of food clearly have lengthened life spans over the long run.  But at the same time, better and more sophisticated (and more costly) health care has contributed not only to decreases in mortality, but also to improvements in the quality of life for older persons.  Still, life expectancy improvements are no more easily predictable than changes in child bearing, and probably less so.

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The basis of projections into the future would make Nils Bohr even more confident in his lack of confidence.  Forecasting requires taking a position on whether the human body has limits that recent improvements in life expectancy are gradually beginning to reach.  Projection models based on progress against specific causes of death tend to be relatively pessimistic about future progress; other models relying on average extensions of life spans to date imply greater continued increases in life expectancy.  Some question the extent to which American society has stymied its own potential mortality improvements through bad behaviors such as overeating (reversing the long-term positive effect of diet), sedentary lifestyles, smoking (recently reversed to a gratifying extent) and alcohol, and violence.  (Indeed, the sideways jog in female life expectancy from the late 1970s through the present has been said by some to result from women picking up some of the bad habits that previously were more prevalent among men.)  Still, the long-term trend toward longer life spans continues, at an unpredictable rate.

Declining mortality means a growing population of persons of ages beyond customary participation in the labor force.  And custom itself has changed, as rising standards of living have raised expectations of years in retirement.  This trend has increased the size of the retired, non-employed population relative to the size of the work force – which itself has grown more slowly because of downward trends in child bearing.

In addition to the withdrawal of the elderly from the work force, declining mortality results in greater costs on society because of the needs of the elderly not just for cash income, but also for health care.  And as noted earlier, health care has become increasingly more expensive as it has become more sophisticated.  There is real debate over whether health care has merely become more costly, or whether improvements in quality have been so great as to outweigh the increase in price.  The economist’s quick answer to those who complain about the rising cost of health care is that few people with serious illnesses today would wish to receive 1960s health care at 1960s prices.  Still, society must (that is, has chosen to) devote more of its resources to caring for the elderly, which has reduced the resources available to raise the standards of living of younger persons.

This cost has been increased even more rapidly by the fast-growing population of the “old-old” or the “frail elderly,” generally identified as those of age 85 and over.  That population is extremely unlikely to be engaged in market work, and is in the greatest need of costly health care.

So put those two phenomena together.  Reduced child bearing slows the flow of new workers into the labor force, reducing the nation’s potential output.  Reduced mortality makes the dependent population larger – increasing the claims on that reduced output – even as increases in living standards have encouraged workers to retire earlier, thereby to enjoy ever longer retirements on the basis of public benefits that swell government budgets.  Over extended periods of time, those long-term, predictable forces reduce average standards of living (net of the cost of retirement programs) and increase the burden of government finance.  The weight on government budgets is relatively widely discussed; the chart that follows illustrates that the projected increasing costs of programs for the elderly – health care much more than cash benefits – explain more than the total of the long-term budget problem.

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One-Time Developments

It was noted above that premature death by violence is one factor holding back increases in longevity in the United States.  Violence has been a factor in demographic outcomes for centuries, of course, and the extreme form of violence is war.  Superimposed upon the long-term U.S. demographic trends has been a one-time (or at least thankfully rare, in terms of magnitude) event which some seem to believe, erroneously, is the only important source of our nation’s demographic challenge: the “baby boom” following World War II.

After imposing its painful cost in deaths – primarily of young adult males – with a corresponding comparative dearth of childbearing, the war led to a perfect storm of population growth.  Postponed childbearing came in a rush, aided by a period of extraordinary economic growth and prosperity.  (Forced wartime saving facilitated increases of consumption, while the return of the troops and the conversion of military-production facilities supplied the goods.)  Thus, between 1946 and 1964, the long-term trend of declining childbearing was interrupted by a sharp increase – which is clearly evident in the chart above.

To some, the baby-boom generation has looked like nothing more than a scheduled train wreck.  Over recent decades, the then-impending retirement of that population bubble (1946 plus 62 years, the minimum age for collection of Social Security benefits, equals 2008; 1946 plus 65 years, the eligibility age for Medicare, equals 2011) marked to them only a period of greater demands on the economy’s output to support a growing retired population.  That aspect of the baby boom certainly was true, but it was only one half of the picture.

Consider the alternative demographic history of Japan.  At the end of World War II, Japan had endured an even worse devastation of its population than this nation, which was matched by a devastation of its homeland.  In contrast to the United States, Japan did not have the wherewithal to support a baby boom.  Whereas the United States had its long-term trends of declining fertility and mortality with a baby boom superimposed, Japan had the same long-term trends, but without the baby boom.

As a result, Japan’s demography was strikingly different.  The following chart shows that the size of Japan’s retired population relative to its working-age population grew steadily throughout the post-war period, and most notably from about 1970 through the present.  The popular literature about Japan has been replete with references to an “aging society,” and to the burden that it has imposed upon the national government’s finances.  For Japan, population aging has been not an impending problem, but rather a now problem.

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In contrast, the U.S. baby-boom generation, which some have considered an unalloyed burden, provided a significant – though temporary – respite from the problems of population aging.  The “senior class” of the baby boom, those born in 1946, began to enter the labor force roughly 20 years later, in the mid-1960s.  From that point until very recently, the entire baby boom has advanced from entry-level work into the most senior and highly compensated ranks of the labor force.  In terms of the chart above, while Japan’s elderly dependency ratio approximately quadrupled from the 1960s through about 2010, that of the United States remained relatively constant – postponing the effects of the longer-term trends of declining fertility and mortality.

In other words, with respect to the baby boom, there is good news and bad news.  The good news is that for roughly 50 years, from the first baby-boomers’ entry into the labor force to the beginning of the retirement of some of the younger vintages, our nation had a temporarily expanded population of workers.  The baby boom gave the United States the opportunity to save as a nation, build up a larger stock of productive capital, and prepare economically for its own retirement.  That generation was like the biblical seven fat years, to be followed predictably by seven lean years.  We had the prophecy in hand.

The bad news is that we blew that chance.  It is over.  In 2011, as the senior class of the baby boom lined up to enroll in Medicare, the nation had accumulated a public debt that was almost twice as large, relative to the size of our economy, than it had been in 1964, the last year of the elevated birth rates that constituted the baby boom.  Instead of being prepared for the retirement of the baby boom, we are comparatively impoverished just as the burden is at the door.

There are some things that the nation still can do to address the delayed rush of population aging, some of which the market itself will drive.  We need to get our federal budget in order – though in today’s weak economy, that will be difficult.  It will entail savings through our retirement and healthcare programs – and everywhere else in the budget, because the ultimate enforcer of the problem is debt accumulated from whatever source.  We need to encourage older workers to stay on the job and postpone retirement – though many already feel compelled to do so because of their depleted investment portfolios.  There are some legal issues surrounding pensions that need attention; the nation needs to make it easier for older people to retire gradually, reducing their work hours for a time rather than cutting those hours directly to zero because pension rules demand it.  And employers should consider the opportunities presented by a growing population of older potential workers.  However, with the pressure of a slowing rate of growth of the total potential labor force because of long-term declining birth rates, employers likely will do that without particular urging.

Prediction about the future is very difficult.  We do not know precisely what will happen to child bearing and mortality.  But we cannot assume that all news will be good – and that is what we implicitly are doing by procrastinating on the important steps that could help us to prepare – belatedly – for the coming demographic challenge.

1 comment
  1. Dave Thomas said:

    Transferring trillions of dollars from the young to the old through social security and Medicare is the single worst economic disaster in our nation’s history.

    When will a class of leaders end this insanity??!!

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