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Summary The United States is at the start of a major demographic shift. In the coming decades, people aged 65 and over will make up an increasingly large percentage of the population, and the ratio of people over 64 to people aged 20 to 64 will rise by 80 percent. This shift will have broad macro economic implications as well as important fiscal consequences for govern- ment programs that help support older persons, particularly Social Security, Medicare, and Medicaid. Because population aging is a gradual process, the social and economic challenges that it poses rarely attract the immedi- ate and focused attention of the policy process. Recognizing the need for further attention to these issues, in 2010 the Committee on the Long-Run Macroeconomic Effects of the Aging U.S. Population was organized by the National Research Council to examine the likely long-term macroeconomic effects of the aging U.S. population. This report presents the findings of the committee. The aging of the U.S. population is the result of two long-term trends. The first is that people are living longer. Fifty years ago, average U.S. life expectancy was 67 years for males and 73 years for females; today, those numbers are 76 and 81. Longer life is to be celebrated, and the discussion of the fiscal challenges that result should not distract from this key point. The second trend is that many couples are choosing to have fewer children and to have those children somewhat later in life relative to previous genera- tions, so birth rates are lower. In 1957, at the height of the post-World War II baby boom, the fertility rate was 3.7 births per woman; the average for 2006-2010 was slightly less than 2.1 births per woman. With people living longer and fewer children being born, it is virtually certain that the popu- 1

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2 AGING AND THE MACROECONOMY lation will age substantially in the next few decades. Health at older ages has also improved over the last half century as disability rates have fallen, and many of the additional years that people are living are healthy ones. However, the decline in disability appears to have stopped around 2000, and the future trend is uncertain. Nonetheless, the committee finds there is substantial potential for increased labor force participation at older ages if people so choose. While the baby boom generation, whose oldest members are now at retirement age, has made the phenomenon of population aging more noticeable, the coming demographic transition is not just about the baby boom cohort. It is, fundamentally, about longer-run factors. Popula- tion aging is a broad, more pervasive trend that is here to stay. There is already a very broad consensus that population aging will place fiscal pressure on the major government programs that help support older persons in this country. Social Security, Medicare, and Medicaid are on unsustainable paths, and failure to remedy this situation raises a number of economic risks. Health care costs per eligible person have been growing substantially faster than per capita income for decades, and if this pattern continues, it will interact with population aging to drive up public health care expenditures strongly. Recent reforms attempting to address this prob- lem could lead to fundamental change in the delivery, quality, and cost of care, but their impacts are as yet unclear. Leaving aside the effects of population aging on government transfer programs, there are also important effects of aging on the nation's economy. If people continue to retire as they do now, population aging means that there will be proportionately fewer people working to support more and more people who are not working. This means that a larger fraction of national output will be diverted to expenditures by the nonworking older population. This diversion will be even larger because there has been a large increase in consumption per older person relative to younger adults, owing in part to rapidly rising public and private expenditures on health care for the elderly. Changes in the age of retirement have been mixed. Although people are living longer and are in better health at older ages, the aver- age retirement age declined by many years during the twentieth century. However, this downward trend stopped and reversed around 1995, and since then the average retirement age has risen about a year and a half, an important trend. All else equal, this diversion of output to the elderly will make it more difficult to raise living standards. There are four basic approaches for adapting to the new economic landscape created by an aging population, and for providing the resources to support the consumption of households in their later years: Workers save more (and consume less) in order to prepare better for their retirements.

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SUMMARY 3 Workers pay higher taxes (and thus consume less) in order to fi- nance benefits for older people. Benefits (and thus consumption) for older people are reduced so as to bring them in line with current tax and saving rates. People work longer and retire later, raising their earnings and na- tional output. The fundamental issue that society faces is how to adapt in some or all of these ways to absorb the costs of population aging. Each option has differ- ent implications for which generation(s) will bear the costs, or receive the benefits, of an aging population. Whatever the economic consequences of population aging for the United States, it is important to recognize that the U.S. economy is inte- grated in the global economy and that population aging is a global, not merely a national, phenomenon. The past 30 years have witnessed impor- tant changes in the global economy, with implications for workers' job security, wages, and benefits. Trade and financial flows produce ever closer linkages across nations. Population aging is even more pronounced in most other high-income countries than in the United States and is progressing very quickly in some developing countries, notably China. In analyzing the consequences of population aging in the United States, one must consider them in the broader context of a globalized economy whose populations themselves are rapidly aging. Many aspects of population aging are difficult to evaluate, in part be- cause the history of the United States and of other developed nations does not provide many episodes of substantial shifts toward an older population. For example, some have suggested that a future labor force that is older on average than today's might be less productive and less innovative. The com- mittee examined this issue and concluded that any such effects are likely to be small. Others have suggested that an older population might invest its assets differently than a younger one, leading to a drop in asset prices. Again, the committee concluded that any such effect would be small. An older population, and one in which individuals expect to live longer in re- tirement, might accumulate more assets. These assets, when invested, could help enhance productivity and generate asset income and thus improve liv- ing standards. However, the committee was unsure how such an increase in private assets holdings would be related to a likely increase in public debt as the population ages. There is a great deal of uncertainty about exactly how these and other factors might interact to affect future standards of living. The committee believes that even with a significantly older popula- tion, living standards are likely to keep improving albeit more slowly, and that the impact of an aging population on overall living standards is likely

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4 AGING AND THE MACROECONOMY to be modest. This is not to minimize the impact on particular government programs, which will be large. The living standard of older people depends in part on their prior saving and asset accumulation. Research reviewed by the committee sug- gests that between one-fifth and two-thirds of the older population have undersaved for retirement, and the committee expects that the elderly will face greater economic difficulties in retirement than they have in the past, a prospect worsened by their poor financial literacy. While population aging is likely to result in a larger fraction of national output being spent on consumption by older persons, this does not pose an insurmountable challenge provided that sensible policies are implemented with enough lead time to allow companies and households to respond. The ultimate national response will likely involve some combination of major structural changes to Social Security, Medicare, and Medicaid, higher sav- ings rates during working years, and longer working lives. The committee called attention to the cost of delaying our response to population aging. The longer our nation delays making changes to the benefit and tax struc- tures associated with entitlement programs for older individuals, the larger will be the "legacy liability" that will be passed to future generations. The larger this liability, the larger the increase in taxes on future generations of workers, or the reduction in benefits for future generations of retirees, that will be required to restore fiscal balance. Decisions must be made now on how to craft a balanced response. It became clear during the work of this committee that there are many topics for which more knowledge would help inform the decision-making process. This report offers recommendations for further research in four areas: demographic and health measurement and projections; capacity to work and longer working life; changes in consumption and saving; and modeling efforts and data needs.