January 18, 2007
Will Baby Boomers sink the economy?
The aging of the U.S. population will bring challenges and changes
The new chief of the Federal Reserve, Ben Bernanke, is worried about the effect that the aging population will have on the U.S. economy.
Bernanke’s concern is focused on the so-called “Baby Boom” generation. After World War II, birth rates in the United States soared. The oldest members of this generation---those born in 1946---turned sixty last year. The youngest members of the Baby Boom Generation were born in the early 1960s. Those Americans are now pushing fifty. So we have a large wave of people who will be entering their golden years between now and 2020.
Declining birth rates
The Baby Boom eventually ran out of steam. Birth rates declined as the 1960s progressed. Generation X---consisting of those born in the latter part of the 1960s through the mid-1970s---is the smallest American generation since the one born during the Great Depression of the 1930s. (Birth rates declined during the Depression because many Americans could not afford to have additional children.)
Here is where the problem occurs. Twenty years ago the Baby Boomers were the working backbone of the U.S. economy. Today they are retiring, and drawing Medicare and Social Security. Because of the unprecedented size of the Baby Boom generation, we will soon have more people than ever receiving benefits from public entitlement programs for the elderly.
At the same time, the proportion of working Americans to retirees will be shrinking---because there aren’t enough members of Generation X to replace all the retiring Baby Boomers.
There is a bit of good news here: Birth rates increased during the 1980s. (Americans born in the 1980s are known collectively as Generation Y.) The oldest members of Generation Y are already working, and the rest will enter the labor force within the next few years. But the proportion of workers to retirees will still be lower than it was in 1970, 1980, or 1990.
Given these numbers, Bernanke estimates that spending on entitlement programs could reach 15% of GNP by 2030. If these projections play out, the America of 2030 may be a lot less dynamic and prosperous than it is today.
It has already happened elsewhere
The United States is not the first country to experience a rapidly aging population. In Japan----and practically every country in Europe---the problem is much worse. China, by the way, is also getting older---as it has practiced state-enforced population controls over the past 25 years.
The only really young places on the globe today are the Middle East, Africa, and Latin America----none of which are noted for their prosperity. So the idea that youth automatically equals a strong economy is not necessarily axiomatic.
However, the new reality will require some changes. Here are a few changes----in no particular order----that we may need to consider over the next twenty years:
Raise the retirement age: Recently I have been hearing quite frequently that “sixty is the new forty” and that “thirty is the new twenty.”
These slogans can be at least partly attributed to wishful thinking on the part of those who are reaching milestone birthdays. But they do contain an element of truth. As improved healthcare and nutrition extend our life expectancies, they also increase our “functional years.” We are used to thinking of sixty- and seventy-year-olds as idle retirees. In the future, more of these individuals will likely continue to fulfill productive roles in the economy. This doesn’t necessarily mean working forty or fifty hours per week. But it may not mean complete retirement either.
This could be beneficial for everyone. On the whole, our society is too “youth-obsessed.” Despite the fact that average life expectancies are now in the 80-year range, it is still common to hear people go into a major state of anxiety over the approach of their thirtieth or fortieth birthday. This is an anachronistic mindset. Many people in their 60s, 70s, and beyond still have a lot to offer. Conversely, many in their 20s and 30s still have a lot to learn.
Keep more money at home. Even if we increase the minimum retirement age, the aging of the population will still require some additional expenditures on entitlement programs. This means that as a nation, we have to reassess our priorities. The first area that we should look at is foreign aid.
The money that the Bush Administration is spending in Iraq is rightly the target of considerable public scrutiny. But Iraq is only part of the problem. The United States gives away billions of dollars each year abroad---much of which is squandered by corrupt governments that are already mismanaging their own economies. In the postwar era, the United States has evolved into the world’s traffic cop, rich uncle, and firefighter. This too may be an anachronistic idea that we need to revaluate.
Solve our illegal immigration problem. Immigration from Mexico does slow the increase in the average age of the U.S. population. However, the costs of absorbing so much of the Mexican population outweigh the benefits. A large number of illegal immigrants end up consuming healthcare, education, and other public services courtesy of the U.S. taxpayer. In border states like California and New Mexico, this has become a major drain on state budgets. We wish these people well, but we may no longer be able to afford to offer them the same benefits that we reserve for lifelong taxpayers.
Raise taxes. If we persist in spending so much money abroad, leave the retirement age as it is, and continue to provide entitlements for anyone who can cross the border----then a tax increase is inevitable. Americans may still have lower tax rates than the citizens of France or Sweden, but we will be paying more. Count on it.
* * *
This is admittedly an incomplete list; and most of these changes would conflict with some ideological agenda on the Right or the Left. (The idea of ending foreign aid would find detractors in both the liberal and conservative camps.)
Nevertheless, the first rule of economics is that “there is no such thing as a free lunch.” As our demographic makeup changes, our priorities will have to change as well. This is neither good nor bad, conservative nor liberal. It is simply a fact of life.
Notes:
http://money.cnn.com/2007/01/18/news/economy/bernanke.reut/index.htm?cnn=yes