November 23, 2014

Demography Matters

Earlier this month, the National Academy on an Aging Society, a policy institute established by the Gerontological Society of America, released a report entitled Demography is Not Destiny. The study, widely quoted in the news media, argues that the public has been misled about the size and cost of the coming age wave -- and that there's really no reason to worry.

But it's the Academy's report that misleads. Any attempt to provide a "broad context" for the debate over Social Security and Medicare reform is welcome. But the arguments advanced by the Academy are flawed. Let's take them one at a time:

* Argument One: The Baby Boom is not really that large. The Academy makes a big deal out of the fact that almost as many babies are now being born each year as during the Baby Boom. While true, this is irrelevant. What matters fiscally and economically is the relative size of a generation -- and today's "Millennial" cohorts make up a much smaller share of the total population than Boomers did when they were kids.

The reason is that the Baby Boom was the product of a much higher fertility rate -- an average of 3.3 lifetime births per woman from 1946 through 1964 compared with just 1.9 since 1980. The inevitable sequel to declining fertility will be a declining ratio of taxpaying workers to Social Security beneficiaries. Today that ratio is 3.4 to 1. In 2030, when Millennials are in the workforce and Boomers are retired, it will be 2.0 to 1.

* Argument Two: Fewer children will offset the extra cost of more elders. The Academy is right that the number of children is projected to fall as a share of the population. (This of course contradicts its earlier argument -- but never mind.) It is wrong, however, that this decline will do much to ease the burden on tomorrow's workers. What the "total dependency" argument ignores is the vastly greater cost of supporting each senior. At the federal level, the ratio of per capita spending on the elderly to spending on children is nine to one. Even including state and local spending, and hence the nation's entire education budget, the ratio is three to one.

* Argument Three: The projections are uncertain -- so we needn't worry. While long-term demographic and economic projections are indeed uncertain, that is no reason for complacency, especially since so many experts suspect that the cost of the age wave could far exceed the official projections. The Academy itself admits that we may be wildly underestimating future longevity. Consider: The Social Security Trustees project that U.S. life expectancy in the year 2050 will be no higher than Japanese life expectancy already is today.

* Argument Four: Economic growth can make Social Security and Medicare affordable. The Social Security Trustees project that economic growth will slow in the future -- to just 1.3 percent per year by the 2020s. According to the Academy, if the economy grows at 2.8 percent per year -- about its average over the past two decades -- government spending as a share of GDP will be no higher in 2030 than it is today.

The Academy forgets that senior benefit levels are linked to wages and living standards, and so will grow in tandem with the economy. But more important, it forgets demographic reality. By the 2020s, as Boomers retire en masse, growth in the workforce will slow to near zero. For the economy to keep growing at its historical rate, America would have to more than double its rate of productivity growth. It's a shame that an institute devoted to aging policy doesn't do more to explain the full implications of a demographic revolution whose effects, write aging experts Alan Pifer and Lydia Bronte, will be "at least as powerful as those of any of the great economic and social movements of the past."

We certainly agree with the Academy that demography need not be destiny. Farsighted policy choices today can help ensure that an older America is still a prosperous America. But obviously, demography matters. If we choose to ignore its implications and fail to change course in time, the future may not be so bright.

FACING FACTS AUTHORS: Neil Howe and Richard Jackson CONCORD COALITION EXECUTIVE DIRECTOR: Martha Phillips

 

. Last updated: 26 Jan 1999