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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.
