Friday, August 31, 2012

The Demographic Tipping Point has Arrived ... Since We're Living Longer, Can We Afford Not to be Working Longer?

We've reached the tipping point between longevity and work. Until recently living longer added to a country's GDP as adding more young people to the work force increased workers as a percentage of the population. Now that as a society the oldsters are living much longer and therefore spending more years in retirement, the reverse is true.

Financially, we can't afford to fund the overall demographic based transition underway of more older consuming years to fewer younger producing years. Things have changed dramatically demographically, and it will have profound implications for future retirees and workers alike.

Simply put, we're living longer and retiring earlier. That's a calculation that doesn't work economically over time, assuming we don't want to lower our living standards while working. Let's look objectively at the situation today.

First, if we live longer and work longer, so much the better. But if we live longer and work the same or fewer years, that will place an enormous strain on future workers unless we have saved enough for our own retirement years while working.

And if we were willing to work longer, what could we oldsters do? How about, among other things, doing the government's administrative work, taking teaching positions and performing clerical office based jobs, to cite just a few examples?

And what would those current workers that we'd displace from the public sector then do? How about building businesses or just plain working in the private sector? But we need more jobs to do first, and that can't come from the public sector which is already bigger than we can afford, assuming we don't want to raise taxes dramatically. And we don't.

So that, in turn, brings us straight back to the need for solid economic growth and the related creation of millions of new jobs.

Economic Pros and Cons of Longer Life Spans says this about the current demographic situation in the U.S. and its connection to our underfunded and unaffordable welfare entitlements system:

"Once upon a time, longer life spans paid a clear demographic dividend: More kids made it to adulthood where they could produce goods and services and more younger adults survived. That meant more working age folks, and that led to higher economic output per capita.
But something different is happening now. “Instead of additional years of life being realized early in the life cycle, they are being realized late in life,” Stanford University economists Karen Eggleston and Victor Fuchs write in the current issue of the Journal of Economic Perspectives with the usual complement of charts and tables. {NOTE: Please take some time to review  the referenced article's contents.}

In the first half of the 20th century, the decline in death rates was more salient for infants and children; in the second half, it was more salient for those over age 70. At the beginning of the 20th century, they calculate, about 20% of the increase in life expectancy in the U.S. occurred after age 65. 

At the end of the 20th century, more than 75% occurred after age 65.

That’s good in a lot of ways — especially to those who live longer and their families. But it does turn out to have big economic implications. If it means people work later in life, that boosts economic output. If it means a growing fraction of the workforce lives longer and longer in retirement, it doesn’t.

“As people foresee longer lives, they might choose to work longer, save more and/or invest in human capital in sufficient amounts and innovative enough ways that longer lives continue to contribute to increased prosperity,” Profs. Eggleston and Fuchs say. “It is not clear, however, that the U.S. or other high-income countries even further along in the new demographic transition are reshaping their policies and institutions sufficiently in response to the longevity transition.”

In other words, the typical age of retirement isn’t rising nearly as fast as life expectancy. Public policy, they argue, should encourage more of those over 65 to work (and more employers to hire them), to encourage healthier lifestyles so older people are more productive and to encourage saving more for retirement.

As another Stanford professor, John Shoven, puts it: “People cannot expect to finance 20-25-year retirements with 35-year careers. Not in Greece [or] the United States.”"

Summing Up

Facts are stubborn things, as the elder President Bush was fond of saying.

We need jobs. We also need economic growth in the private sector to provide those jobs.

And in the future people either will have to choose lower standards of living and a much higher savings rate during their working careers, or elect to work longer as they age.

Choosing lower standards of living will mean weaker economic growth. On the other hand, choosing longer working careers will result in greater economic growth. The math is that simple and straightforward.

Let's recap.

Old days --- Here's how it used to work. Increasing longevity as a society meant more workers and greater GDP. More younger people working as a percentage of the entire population.

New days --- All other things being equal, getting older as a society means fewer workers, longer retirements and lower GDP. Fewer older people working as a percentage of the entire population.

In sum, something's gotta give. And relatively soon, too.

Thanks. Bob.

No comments:

Post a Comment