This is the first of a five-part series investigating the economic and financial ills implicit in the country’s aging demographics and what can be done to mitigate them. It draws heavily on the deeper discussion in Ezrati’s recent book Thirty Tomorrows. This first installment lays out the demographic facts and why they present financial and economic dangers. Each subsequent installment will take up possible ways to ease the strain.

By Milton Ezrati | Apr 23, 2018 | This article originally appeared in Forbes

Milton Ezrati is a Wall Street veteran and writes on markets, economics, and is senior economist for the NY communications firm, Vested. Check out his latest book Thirty Tomorrows. Follow him on Twitter at @MiltonEzrati.


Two long-standing trends lie at the root of the country’s demographic problem. One, medical science has dramatically increased life expectancy. According to the Census Bureau, the average American born today can expect to live to about 80, up dramatically from the 68 years averaged in 1950. Life expectancy at age 65 has jumped from 79.7 years in 1950 to 84.3 presently. In other words, the average American now can expect to live in retirement for almost 20 years. While all this is positive, it means that the nation will face an ever-larger dependent population of retirees. Compounding any strain from this unprecedented dependency, medical science and changing customs have at the same time greatly reduced birth rates. The Census Bureau notes that whereas the average American woman in 1950 had 3.5 children over her lifetime, the figure today has fallen below 2.0.

With fewer young workers to support an ever-larger retired population, the economic and financial strains become harder to avoid. The statistics are striking. In 1950, the economy had at its disposal 8.1 people of working age for each person of retirement age. The most recent figures indicate that this “dependency ratio,” as the demographers call it, has shrunk to just over 5.0. By 2030, Census estimates it will have fallen to 3.0. Even if the average retiree had ample savings to sustain himself or herself, which is hardly the case, those trends will leave the economy struggling to find enough workers to support the population’s demands for goods and services. After all, retirees, though they have ceased active production, still consume. Each of these three workers will have to produce enough for himself or herself as well as his or her personal dependents and one-third of what each retiree consumes, a heavy burden indeed.

Even in an era of incredible technological marvels, such a shortage of talented workers will necessarily slow the pace of economic growth. A few years ago, when the pace of growth regularly disappointed, several analysts explained the poor economic showing in terms of these demographic pressures. Since, the acceleration of growth has quieted such talk. But if demographics cannot explain cyclical variations, they do point ultimately to an economic drag. Some academic research suggests that the aging trend alone could cut the economy’s historic growth rate down by a fifth. Some estimates look more ominous, suggesting that growth would stop altogether. Commentators, of course, cannot resist hyperbole. The Peterson Institute has stated flatly that “aging could trigger a crisis that engulf the world’s economy [and] may threaten democracy itself.” Perhaps a risible response to the problem, but still, exaggeration in some quarters provides no excuse to ignore the significance of the underlying problem.

In the demographic debate, many have downplayed the urgency, pointing to artificial intelligence (AI) and other technological fixes as an answer to the nation’s future labor needs. Such observations no doubt carry a measure of comfort. AI and other such fixes could certainly delay the day of reckoning. But even as people look to such wonders for answers to the human shortfall, the aging trend casts a shadow over the economy’s future ability to innovate as well as to produce. Many scientists and social historians, Albert Einstein and the great mathematician John von Neumann among them, have stressed that it is youth that produces essential scientific advances. Such commentators have much evidence on their side, too. Einstein gave the world his groundbreaking theories at age 26. Most other notable scientists have done their most important work by age 30. A study of scientific Nobel laureates indicates that on average they do their significant work before age 35. The evidence may be far from conclusive, but sufficient to question any complacency around continuing advances in AI.

Demographic trends also raise questions about how the economy will pay for technological substitutes. Though the relative labor shortage will tend to raise real wages, especially for people with the training the economy wants, and so drive business to find technological substitutes, the rise in labor costs will also cut into profitability, by as much as 10% according to some studies, leaving business with less ability to finance basic research into such technologies much less their practical implementation. Indeed, reduced levels of profitability raise questions about business’ willingness or ability to spend on expansion generally.

Additional financial implications of aging demographics will compound such problems. Because retirees tend to draw down on their nest eggs or at the very least stop contributing to them, an outsized retired population will leave the financial system less able to offer capital for economic innovation and expansion, especially since business will also face a profitability squeeze. At the same time, growing demands on public and private pension schemes, as well as healthcare needs, will exacerbate the financial shortfall. The Social Security Administration estimates that over this time such social demands on the nation’s financial resources will increase by a third. To be sure, increasing payroll taxes from increased wages would provide something of an answer to this burden but not a complete one.

The picture does include some bright spots, some natural responses that might mitigate the otherwise ill effects of these trends. Longer life expectancies, for instance, may prompt retirees to draw down on their nest eggs at a slower pace than past trends might indicate, easing some of the financial strains otherwise implicit in these demographic pressures. Medical science, by improving the health of older people, might prompt them to a delay retirement, something that would relieve both the financial strains as well as the deterioration in the nation’s dependency ratio. But if these considerations, as well as AI, mitigate the strains implicit in the country’s relentless demographic predicament, they cannot lift them entirely.

For relief, then, the nation will need to find ways to employ more productive, trained workers to produce for the nation’s needs as well as pay taxes and contribute to pension plans. Part of that effort will insist on workplace adjustments that can bring a greater proportion of the population into productive employment. Part of it will look to trade to supplement demographic shortfalls. Part will involve the hot topic of immigration, on which the next post will focus.

[Photo Illustration by: Media for Medical/UIG via Getty Images]



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