July 24, 2006

KUFM / KGPR

T. M. Power

 

The “Burden” of an Aging Population

 

            As many demographers and economists have pointed out, our population is aging. This is not just due to the bulge in population created by the post-World War 2 baby boom that is now approaching retirement age. It is a broader phenomenon associated with two facts:  First, we are not having as many children as we used to, and, second, we are living longer, that is, we get older than we used to.

            In the early 60s the typical family had four children. My parents had five and my older sister had six. Now the number of children that native-born women have in this country is about two, not quite high enough to keep the population from shrinking.

            With fewer children being born and adults living longer, the average age is steadily creeping upward and will continue to do so for as far as we can see into the future. That has led some to worry about the “burden” that this increasing cohort of old fogies will place on younger adults and the overall economy.

            That “burden” is usually measured by the share of total national production that will have to go to supporting a larger and larger number of retired, that is, non-working, individuals. Sometimes this is summarized by the number of workers that will be available to support each aging retiree. Currently there are about three workers for each retiree. That is projected to fall over the next several decades to just two workers available to support each retiree. Some suggest that that will place an intolerable and unsustainable burden on workers.

            There is a certain amount of confusion in this discussion.  First, anyone who is not employed in the commercial economy can be depicted as a “burden.”  Children certainly fall into that category as do parents who forgo work outside the home to care for children. We used to have proportionally larger numbers of children and “housewives” when our families were larger and we made different childcare choices. At that time there was not a lot of talk about the “burden” our children represented. Our kids certainly were, individually and collectively, our dependents, but most people saw them as a blessing, not a burden. Now, instead of a large number of dependents who are children and volunteer caregivers, we face a large number of dependents who are senior citizens and retirees.  In fact, if we look at the overall dependency ratio, the total number of non-working adults divided by the total number of working adults, as our population ages, we will simply be moving back to the dependency rate we had in the 1960s when our families had large numbers of children. That high dependency rate did not crush our economy or impoverish our families then and is unlikely to do so in the future.

            The share of national production that goes to support dependents is determined by three factors. The dependency rate, worker productivity, and the average level of income of the dependents. If worker productivity is rising, an increasing dependency rate need not imply that more and more of the nation’s resources are going to support non-workers. In fact, the same projections that predict that the number of workers available to support each retiree will fall from three to two also predict that over the same time period worker productivity will quadruple. That rising productivity will totally swamp the projected increase in the dependency rate, assuring the potential for an ongoing significant increase in the real income of “workers”. [1] If dependents’ incomes increase as rapidly as worker productivity, something that is unlikely for retirees on relatively fixed real incomes, workers could still see their real incomes rise by 275 percent despite the “burden” of the increasing numbers of retirees. [2] If there were no increase in the proportion of retirees, it is true that workers’ incomes would have increased 20 percent more, but it is not clear that one could describe workers whose incomes had risen 275 percent as crushed by the burden of retirees. [3]

            From a public policy point of view, the aging of our population really raises the question of “So What?”  What could we do to reverse that aging?  Make people have more children? Prohibit the elderly from retiring? Deny the elderly health care so that they die sooner? Purposely impoverish the elderly so that they do not use as many resources? Boost the immigration rate above its already high level? Clearly none of these are reasonable responses.

            A reasonable response might be to invest in ways that would boost the productivity of the economy: improved infrastructure, increased human capital, higher levels of private investment, etc. Higher levels of productivity would make it easier to support our dependent population. But assumedly we should be doing that regardless of the age structure of the population simply to provide a better life for our citizens. Why would we not?

            The aging of our population seems certain and unavoidable. It is not clear that it represents any more of a threatening problem than our high birth rates a half-century ago. Why we would look at our elders, after they raised us and built up the economy we now enjoy, as a “burden” is unclear. We all begin life as dependents and most of us will leave this life as dependents. That simply is part of the cycle of human life. Our culture and society should respect, honor, and support all parts of that cycle.


[1] In this discussion the population is divided between dependents and non-dependents with the distinction made on the basis of whether the person is a working participant in the commercial economy. So if you are not a dependent, you are a “worker.”

[2] This assumes that the benefits of rising productivity are spread evenly across the population. Over the last three decades this has not been the case. Most workers saw little increase in real pay despite major gains in productivity. Most of the productivity gains went to owners of capital and property and a small percentage of very highly paid workers. If this continues, workers would not experience the gains mentioned above but that would not be the fault of retirees. Actually, as workers become scarcer, one would expect wages to rise, possibly reversing the trend in real wages in the recent past.

[3] To present a worst case scenario, we assume that retirees are the only dependents. This, of course, is not the case. As pointed out above, children are also dependents and their numbers will be falling as the number of retirees increases. So the dependency rate will not increase as much as is assumed here.