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Winter 2012 Vol. 12 Number 2



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Aging and the Economy

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The Fiscal and Economic Challenges of an Older Population

The United States is getting older. People are living longer and having fewer children than previous generations, resulting in an increasingly greater proportion of the population that is over age 65. Although the baby boom bulge has drawn attention to the trend, this unprecedented demographic shift is likely to persist and will present the nation with new fiscal and economic challenges.

Many of the costs associated with population aging will be concentrated among government programs that support the elderly, particularly programs related to health. As the oldest of the baby boom generation begin to retire and draw benefits from Social Security, Medicare, and Medicaid, there will be relatively fewer workers contributing to support them. Many are concerned that these programs are already on unsustainable paths and, without changes, will be unable to meet the planned levels of support for future generations.

A recent National Research Council report concluded that the nation has several options for addressing these challenges. Restoring the fiscal balance of entitlement programs will require major structural changes, the report says, but the fundamental issue facing society is how to distribute the costs across current and future workers and retirees. One strategy could be for workers to save more or pay higher taxes. Others include providing fewer benefits to retirees or increasing the number of years people stay in the work force.

Each of these strategies has different implications for the groups that will immediately bear the costs of any policy changes. Each of them also has longer-term economic consequences for personal savings rates and income security, national productivity and growth, and the solvency of federal and state entitlement programs. According to the report, a likely solution will consist of a combination of changes to government transfer programs, higher personal savings rates, and longer working lives.

The challenges to Social Security can be addressed through straightforward adjustments in benefit formulas or increased contributions, although different segments of society vary substantially in how well they could accommodate such changes. Medicare and Medicaid present more complex challenges. For decades, health care costs have grown substantially faster than per capita income; when combined with population aging, public health care expenditures are expected to soar.

Not only will a growing number of people become eligible for these programs in the coming years, they will also draw benefits from them for longer. Many companies and employees still plan financially around the conventional retirement age of 65, even as the rise in longevity means that many people are enjoying more years away from the work force. Some measures show that as many as two-thirds of Americans have not saved enough for these extra years of retirement and they are likely to become heavily dependent on public transfer programs.

The report suggests that, for many Americans, extending working years beyond age 65 is both a realistic policy option and an available individual choice. People who choose to retire at 65 often do so in the interest of leisure or because of employer incentives, but generally not because of health issues that would prevent them from continuing to work. In addition, the report found no evidence that an older work force would stifle innovation, decrease productivity, or keep jobs away from younger workers. Longer working lives would also allow individuals to save longer, contribute more to national output, and delay payouts from pensions or entitlement programs.

The challenges of population aging are not insurmountable, the report says, but policies are needed sooner rather than later to give companies and households enough time to adapt and adjust their financial plans. Waiting to take action will increase the liability for future generations, and the solutions will become much more costly. -- Lauren Rugani


Aging and the Macroeconomy: Long-Term Implications of an Older Population. Committee on the Long-Run Macroeconomic Effects of the Aging U.S. Population; Board on Mathematical Sciences and Their Applications, Division on Engineering and Physical Sciences; Committee on Population, Division of Behavioral and Social Sciences and Education (2012, 256 pp.; ISBN 0-309-26196-1; available from National Academies Press, tel. 1-800-624-6242; $49.00 plus $5.00 shipping for single copies.

The committee was co-chaired by Roger W. Ferguson, chief executive officer at TIAA-CREF, New York City, and Ronald Lee, professor of demography at the University of California, Berkeley. The study was funded by the U.S. Department of the Treasury and the National Institute on Aging.

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Copyright 2012 by the National Academy of Sciences