An aging United States reduces the economy’s growth — big time. That’s the startling conclusion of a new academic study, and if it withstands scholarly scrutiny, it could transform our national political and economic debate.
We’ve known for decades, of course, that the retirement of the huge baby-boom generation — coupled with low birthrates — would make the United States an older society. Similarly, we’ve known that this would squeeze the federal budget. Social Security and Medicare spending would grow rapidly, intensifying pressures to cut other programs, raise taxes or accept large budget deficits. All this has come to pass.
But the study goes a giant step further, claiming that the very fact that the United States is an aging society weakens economic growth. “The fraction of the United States population age 60 or over will increase by 21 percent between 2010 and 2020,” says the study. This aging shaves 1.2 percentage points off the economy’s present annual growth rate, the study estimates.
Although this seems small, it’s enormous. Consider the numbers. From the 1950s to 2007, the economy (gross domestic product) grew about 3 percent a year, sometimes a little more, sometimes a little less. By contrast, annual growth since 2010 has averaged about 2 percent. But add in the 1.2 percent annual growth lost to aging, and we’re roughly at 3 percent growth again.
To say the same thing differently: If other economists confirm the study, we’d probably resolve the ferocious debate about what caused the economic slowdown. The aging effect would dwarf other alleged causes: a lag in new technologies; increasing economic inequality; debt hangover from the housing bubble; government over-regulation ; heightened risk aversion by shoppers and firms, reflecting the legacy of the Great Recession.
In effect, demographics rule. The theory’s added appeal is that it might apply globally, because almost all advanced countries are experiencing both aging populations and slower economic growth. This implies — but does not automatically prove — a common cause.
Still, it won’t be easy to convince other economists that aging explains most of the economic slowdown. Probably the theory will strike many as too simple. “I start with a strong skepticism that one factor explains where we are,” says Brookings Institution economist Gary Burtless, who has also done research on the impact of aging.
Co-authored by economists Nicole Maestas of Harvard Medical School and Kathleen Mullen and David Powell of the Rand Corp., a think tank, the study on aging compared U.S. states with fast- and slow-growing elderly populations. States with the fastest increases in the elderly also had the weakest economic performance. These relationships then formed the foundations for the study’s broader conclusions. (The study was recently released as a working paper of the National Bureau of Economic Research.)
Generally, aging poses two possible adverse economic effects. One is uncontroversial. As swarms of retirees leave the labor force, there are relatively fewer workers to support production. This hurts economic growth, but it represents only one-third of the slowdown, the study estimates. The other two-thirds reflect reduced productivity; workers become less efficient. Not just older workers — all workers. That’s surprising, and there’s no clear reason. This is the study’s weak point. The conclusion rests on data points that can’t be explained.
There are theories. It could be that as experienced workers retire, their positive effect on the work climate is lost. “If I’m working with someone who is relatively unproductive, I may become less productive [myself],” Powell says. Although this is plausible, it’s also guesswork, as Powell admits. It’s also partly undercut by Burtless’s research, which found that the most skilled older workers stay in their jobs longer.
Or it may be that as societies age, they become more cautious. Their members value stability and security over ambition and adventure. They’re more restrained and realistic and less experimental and optimistic. If these values strengthen as people age, they may impose a stand-pat and conservative bias on businesses and households.
On the whole, the study reveals bad news. One way that advanced societies can handle aging populations is through faster economic growth, which enables younger generations to pay the elderly’s benefits without sacrificing too much of their own incomes. But if aging is a cause of slower economic growth — even if the impact is less than the study suggests — then this avenue is of limited help.
As a society, we need a better balance of obligation between the older and younger generations. Until now, policy has favored the elderly. The remedies to shift the balance are well-known: higher eligibility ages for government benefits; less generous benefits and tax breaks for wealthier retirees. None is politically easy. If slower economic growth is linked to aging, the competition for scarce funds will become even harder. It’s a dismal connection.
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