Aging, the World Economy and the Coming Generational Storm
Friday, February 04, 2005
by Laurence Kotlikoff, Hans Fehr, and Sabine Jokisch
Table of Contents
- Executive Summary
- The Coming Generational Storm
- Simulating the Effects of Aging
- Simulations for Closed Economies
- Simulations for Open Economies
- Can Immigration Help?
- Can Private Pension Reform Solve the Problem?
- The Impact of Private Pension Reform on Selected Groups by Income and Age
- About the Author
The Coming Generational Storm
“The number of workers available to pay their benefits will rise by less than 10%.”
Readers of this report are about to experience the greatest demographic change in human history. The largest part of the change will happen in the next 30 years — as 77 million baby boomers in the United States cease to work and pay payroll taxes and instead retire and collect benefits. Even more dramatic changes will occur outside the United States, in countries whose fiscal futures are more dire than our own.
In The Coming Generational Storm, Kotlikoff and Burns ask the reader to imagine what the United States will look like in the year 2030. “What do you see?” They reply:3
“Fertility rates are falling in developed countries.”
You see a country whose collective population is older than that in Florida today. You see a country where walkers outnumber strollers. You see a country with twice as many retirees but only 15 percent more workers to support them. You see a country with large numbers of impoverished elderly citizens languishing in understaffed, overcrowded, substandard nursing homes.
“The decline in the population of Europe will offset the rise in the United States.”
You see a government in desperate trouble. It’s raising taxes sky high, drastically cutting retirement and health benefits, slashing defense, education, and other critical spending, while borrowing far beyond its capacity to repay. It’s also printing tons of money to “meet” its bills.
All developed countries are facing similar bleak futures due to rising life expectancies and falling birthrates. Life expectancy grew dramatically in the last century, a trend that is likely to continue:4
- At the beginning of the 20th century life expectancy was only 47 years, the average American was 23 years old (median age) and only 4 percent of the population was 65 or older.
- Today, life expectancy at birth is 76 years — a gain of 29 years; the average person is 36 years old and 12 percent of the population is age 65 or older.
“Most developed countries’ populations will decline — even with immigration.”
At the same time that those who are born can expect to live longer, fewer people are being born. One measure of the birth rate is the fertility rate — the average number of lifetime births per woman — and this number has been falling in most countries around the world for some time. In general, a fertility rate of 2.1 is needed to replace the population in developed nations. Currently, the United States is hovering at about that point. Most other developed countries, however, are well below it. As Figure I shows:
- In Italy (a Catholic country!) the fertility rate is only 1.2.
- In Germany and Japan the rate is about 1.3.
“The world has never seen fertility rates this low.”
The world has never seen fertility rates this low, and the consequences are striking. For one thing, countries below the replacement rate will see their populations peak and then decline. Although Figure IIa shows that the United States will gain about 100 million people over the next 50 years, this growth will be offset by the loss of 100 million people in Europe. Figure IIb shows the expected 50-year population decline for selected countries, with significant contractions in Japan, Germany, Italy and Russia.
“The average median age will rise.”
Another consequence is that the average age in developed countries will continue to rise. As Figure III shows:
- By mid-century, the average person in the United States will be 41 years old.
- The average person in Europe will be 50 and in Japan 53.
“By 2030, there will be only about two workers for every retiree.”
Aging throughout the developed world will also create enormous financial pressures, given the pay-as-you-go nature of many government entitlement programs. Back in 1950, the average number of workers per Social Security beneficiary in the United States was 16.5. By 2000, the ratio had fallen to 3.4 — about three workers per retiree. By 2030 we will be down to about two workers for every retiree. Over the 80 year period from 1950 to 2039, the intrinsic cost of supporting a retiree will increase eightfold.