OCTOBER 2004

Economic Impact of Population Aging

In remarks before a Federal Reserve Bank of Kansas City symposium on global demographic change, Federal Reserve Chairman Greenspan outlined the economic implications of the relative aging of the U.S. population and the policy considerations generated by such changes.

The percentage of the U.S. population that is over 65 is expected to increase from the current 12 percent to approximately 20 percent by the year 2035. The decline in the fertility rate after the post-World War II baby boom coupled with longer life expectancy has led to an increase in the ratio of older adults to working-age younger adults. This rise in the so-called elderly dependency ratio will most certainly exacerbate the burden on the economy from shortfalls in Social Security and Medicare programs. The ability of the economy to fund retirement benefits depends on the growth rate of the employed population and its productivity. Chairman Greenspan noted, however, that "...Americans have been retiring at younger ages...[and] immigration would have to be much larger than almost all current projections assume...[to] lessen the decline of labor force growth in the United States." Therefore, an increase in output per worker is the key to growth in U.S. GDP that would allow for the expected standard of living for future retirees.

Given that the U.S. has experienced tremendous gains in productivity over the past ten years while utilizing the latest technologies, it is unlikely that the pace of productivity growth can continue indefinitely. Chairman Greenspan suggested that one way to improve the likelihood of continued gains in productivity growth "...is to engage in a long overdue upgrading of primary and secondary school education in the United States." Other policy choices that could lessen the effects of the coming demographic change include: 1) increasing the age at which retirement benefits are received; 2) a decrease in the growth of Medicare spending; and 3) curbing the retirement benefits received by future retirees.

Chairman Greenspan remarked that while "[t]he decade-long acceleration in productivity and economic growth has seemingly muted the necessity of making [difficult policy] choices...[n]onetheless, tough policy choices lie ahead." He added that the U.S. is in a better position than other developed nations to make the necessary policy adjustments to address the impact of the relative aging of the population due to its open labor markets, efficient capital markets, and receptiveness to immigrants.