The Aging of America: Is It an Economic Problem?

For decades, environmentalists concerned
about overpopulation and social
workers concerned about families have
both advocated family planning, and by
that they mostly mean having fewer children.
And indeed, throughout the world,
including both developed and underdeveloped countries
in every continent, birth rates have fallen dramatically in
the last forty years. In the U.S., the birth rate per woman
dropped from 2.5 in 1970 to 2.1 in 2006, and that is a
comparatively small drop. According to the World Development
Indices of 189 countries published by the World
Bank, in China, for example, the recorded drop was from
5.8 births per woman in 1970 to just 1.8 in 2006; in India
from 5.8 to 2.5 over the same period; in Japan from 2.1 to
1.3; in Germany from 2.0 to 1.3; in Kenya from 8.0 to 5.0;
in Brazil from 5.0 to 2.3 and Mexico from 6.6 to 2.2.
Now some influential and well funded organizations
such as the Peter G. Peterson Foundation are getting a lot
of attention for saying we face a crisis: The Aging of America.
The ratio of retirees to workers is increasing, for two
reasons. First, as we just saw, people are having fewer
babies—that’s fewer replacements for retired workers. Second,
people are living longer—that means retirees stick
around longer collecting pensions and social security and
getting lots and lots of expensive health care. Is this really a
big deal? The short answer is no. It is not a big deal (except
maybe the health care part, but that’s another article).
Look at the birth rate numbers given above, and how
they have changed. Were it a major problem, most countries
would be in a lot more trouble than the U.S. Indeed,
some writers suggest this very thing, writing articles about
China getting old before it gets rich, about the graying of
Japan, about the heavy burden of retirees on European
economies. The funny thing is these articles appear mostly
in the U.S., where they seem to appeal to local prejudice. In
those other countries, few seem to think the issue worth
even discussing. Why not? The answer is that retirees are
only part of the story. While it is true that they are dependent
on the productive work of non-retirees, and that their
proportion of the total population is everywhere increasing,
it is also true that they are not the only dependents.
There is another big group of dependents—children.
The point is that the important number is not really the
ratio of only retirees to workers, it is the ratio to workers of
both retirees and children. This second ratio is known as
the dependency ratio. You get the dependency ratio by
adding together all those below 15 and all those over 64,
and dividing the total by the population in between those
ages. Of course this is still a very approximate measure. Not
everyone between 15 and 64 really is productively
employed, while some below 15 or above 64 may be. The
average annual cost of supporting a child is probably not
the same as the amount to support a retiree. Also, when
comparing the dependency ratios in different countries,
you have to remember the cost of supporting children or
retirees is not everywhere the same. Conditions and standards
of care do differ. Even with all that in mind, it
remains obvious that the total dependency ratio is a much
more relevant measure of the cost burden on workers than
the ratio to workers of only retirees.
If you make a graph based on the information from the
World Development Indices comparing the total age
dependency ratios with the ratios to workers of just people
over 64, it looks like the capital letter L. What you see is
that as you move from countries with less than five percent
of the population over 64 to countries with over 30 percent
over 64, the total dependency ratio first drops dramatically,
and then basically levels off.
How can this be? The answer is simple. In countries
with really high dependency ratios the fertility rate is very
high—lots and lots of children, and low life expectancies.
In these countries, very few people live to be 65. In countries
with low dependency ratios, there appears to be a
roughly even trade-off. As the proportion of those over 64
gets higher, the proportion of those below 15 gets correspondingly
lower, so that the total dependency ratio is
about the same for quite a range of countries.
We have determined that the “Aging of America” is not
as dramatic as the “Aging of the Rest of the World,” and
that the aging trend does not mean an increase in overall
dependency. So, there is no economic crisis to worry
about—at least not from this source—no new burden on
productive workers. What we do face is a political and
financial challenge. The proportion of retirees is increasing,
so more funding is needed for the social security system
and for pensions, two institutions that have nothing to do
with childcare. But the problem is not about an added burden
on productive workers. Instead, it is about a shift in
the burden from children to retirees. The political challenge
is to persuade people that the money they would in
the past have spent to support an extra child should now
instead go to support the old. The financial challenge is to
adjust the taxation system so that cash flows shift accordingly.
Those are both challenges, both serious enough; but
there is no problem of overall economic viability.