September 2005
The Graying of the Planet: Implications of the Great Global Aging Ahead
The coming century stands to witness an extraordinary worldwide aging of the human population, and the emergence of aged societies will present citizens and policymakers around the world with challenges unknown to their predecessors. Will working populations be able to support growing numbers of retirees living longer than ever before? How will aging pressures affect national pension programs, health systems, and labor markets? Will an increasingly elderly world be capable of sustained economic growth and continuing progress against poverty? And what sorts of adjustments will pronounced population-aging require of our most basic social institutions, including the family? Ronald D. Lee of the University of California, Berkeley, one of the world’s leading demographers, addressed these and other issues at the fourth Henry Wendt Distinguished Lecture at AEI on September 28.
Ronald Lee
University of California, Berkeley
Though there has been some variation among regions, the general population of the world has been undergoing the process of aging for some decades now. This last stage of the demographic transition begins with the rise of life expectancy from approximately fifty years to around seventy-five years at birth and is followed decades later by a decline in fertility from an average of six births per woman to at or below the replacement level of 2.1 births per woman. During this period, the total dependency ratio fluctuates due to the gap in time between the declines of mortality and fertility. After a period of population aging, though, the total dependency ratio returns to near the original level before the transition.
What, then, are the economics consequences of these changing age distributions? Using the current U.S. situation as a case study, we see that the net cost per child is less than the net cost per elder and only between the period of the age of approximately twenty-six and fifty-seven do labor earnings exceed consumption. Though life expectancy is thirty years higher now than a century before, the reason for the decline in labor earnings quite early in life is because the age of retirement has strongly declined from a median of seventy-four in 1900 to a median of sixty-three. Furthermore, while private consumption declines, net consumption also rises at older ages because public consumption, mostly in the form of publicly provided health care, continues to rise. Thus, the population aging raises the net dependency burden on workers. However, compared to other industrial nations, the general cost of population aging is much lower in the United States due to a higher fertility rate and later retirement age.
Although there is the potential for population aging to be an economic problem, there is also a potential for it to be an engine for economic growth. People currently provide for retirement in two ways: 1) through transfers, which include support from family and pay-as-you-go government pensions, and 2) by personal savings. Studying the case of Taiwan as an example, we see that if there were no transfers and only savings and dissavings, savings would initially rise as fertility declined and life expectancy increased; and only later as the population aged and the elderly spent down their assets would savings fall. Labor grows more slowly, however, and despite the fall in saving rates, productivity is raised due to the increase in capital per worker. Thus, demographic transition effects on dependency and savings rates are transitory, though capital accumulation effects are permanent. However, if familial transfers or unfunded public pensions provide for retirement, then population aging simply raises dependency. Therefore, Third World nations in the early stages of this aging process must prepare for these institutional arrangements before the elderly population rises and it is too late. They should consider letting familial support weaken rather than shoring it up.
Looking at the role of the public sector during this transition, we see that there is no pressure of population aging on state and local budgets--education costs dominate their budgets. There is, however, major pressure on the federal budget which covers public pensions (Social Security) and health care for the elderly (Medicare). Consequently, the current program structure will require massive budget balancing towards the end of the century, with either a raise in taxes by 50 percent or a cutting of benefits by one-third. In addition, as health care costs rise, even larger adjustments will become necessary.
To determine if these public transfer programs permit the current elderly to live well at the unfair expense of today’s youth and tomorrow’s newborns, we calculate what each generation gains or loses. Based on an estimation of all taxes paid and benefits (public education, Social Security, Medicare) received for each generation born between 1850 and 2090, we see that if we balance the budget, half by raising taxes and half by cutting benefits, the generational redistribution is opposite to our expectations. Today’s young, as well as the subsequent two generations, are the biggest winners due to the importance of public education. Today’s elderly between the ages of fifty-seven to seventy-four are net losers (slightly), but generations after 2050 will suffer increasingly large losses.
AEI intern Joseph Lin prepared this summary.
