Academic journal article NBER Reporter

The Economics of Aging

Academic journal article NBER Reporter

The Economics of Aging

Article excerpt

Next year, the leading edge of the baby boom generation turns 62 and becomes eligible to receive Social Security benefits. Projecting forward, the U.S. population aged 62 and older will increase from 45 million to nearly 80 million over a period of just 20 years. Compounding the impact of the aging baby boomers are trends in longevity. At age 62, life expectancy is about 20 years for men and 23 years for women, and it is getting longer all the time. Whether this growing population of older Americans works or retires; how much they will have saved for their retirement; what health care they will need, and how much it will cost--are all critical questions. Also important are the policy questions: How will demographic trends affect the public and private retirement support programs that have traditionally been extended to retirees in the United States and around the world? Are these policies financially sustainable? Are they flexibly structured to accommodate a different population demographic, and how might they evolve in response to demographic trends? These questions motivate our research agenda in the Economics of Aging Program. Our aim is to understand more fully the relationships between age demographics, retirement and health care policy, economic behavior, and the health and economic circumstances of people as they age.

Begun in 1986, the NBER's Aging Program has developed primarily around large, coordinated research projects that simultaneously address several interrelated issues in the economics of aging. Extensive funding for the program has been provided by the National Institute on Aging (NIA), both through multiple research grants and through a Center grant, which provides centralized infrastructure support to the program effort. NIA has also supported our efforts to engage new investigators in studying issues in aging, to develop new research directions through pilot projects, and to bring together research teams to collaborate jointly in studying more complex issues and questions relating to aging. Thus the Aging Program has operated in an unusually interactive, coordinated, prospective and collaborative way. The Program has also benefited more recently from a Center grant from the Social Security Administration, which has enabled us to study in greater depth the challenges facing Social Security, its financial sustainability in the face of an older population, its economic structure, and the implications of various approaches to Social Security reform.

More than 100 papers are completed annually by participants in the NBER Aging Program. Some of these appear in a series of books published by the University of Chicago Press, the eleventh of which is forthcoming later this year. (1)

Retirement Saving

One of the most important aging-related trends in the United States is the growth of targeted retirement saving. Over the past 25 years, personal retirement accounts have replaced defined benefit pension plans as the primary means of retirement saving and contributions to 401(k)-type plans have expanded dramatically. A series of studies by James M. Poterba, Steven F. Venti, and me has quantified this transition and considered its implications for the economic circumstances of future retirees (11974, 12834, 13081, 13091). Because 401(k) plans have not existed for the full careers of currently retiring workers, their impact is moderate now, but is becoming more significant with each wave of new retirees. The typical 401(k) participant retiring in 2000, for example, contributed only for about seven years. As time passes, many more new retirees will have participated in 401 (k) plans; they will have contributed for a larger portion of their working careers; and their contributions will have compounded over longer periods of time. We project that if equity returns between 2006 and 2040 are comparable to those observed historically, then by 2040 average projected 401(k) assets of all persons age 65 will be over six times larger than the maximum level ever achieved by traditional defined-benefit pension plans. …

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