Academic journal article Business Economics

Economic Implications of Demographic Change

Academic journal article Business Economics

Economic Implications of Demographic Change

Article excerpt

The United States is in the midst of a demographic transition toward a population age structure with a higher fraction of elderly individuals. The associated growth of transfer programs for which the elderly represent most of the beneficiaries, such as Social Security and Medicare, will place upward pressure on the size of the public sector. The rising number of individuals who are beyond the traditional age of retirement, relative to the number of individuals of traditional working age, will create incentives for longer working lives and for greater investments in human capital by younger workers. Changing age structure may also affect rates of return available to savers, although these effects are likely to be modest. doi: 10.1057/be.2016.5

Keywords: demographic change, economic growth, transfer programs, labor force

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Demographic forces are slow-moving. They are unlikely to account for much of the high-frequency variation in economic activity; but over long horizons, they can affect the relative supply of capital and labor, the rate of economic growth, and other drivers of economic performance. This paper introduces the demographic transition that is currently under way in the United States and sketches ways in which it could affect rates of return, wages, and the rate of economic growth.

1. The U.S. Demographic Transition

Two forces underpin the shift in the age distribution of the U.S. population that is currently under way. One is the ongoing decline in mortality rates at older ages, and the other is the lingering effect of a decline in birth rates that took place in the 1960s and 1970s. Death rates have declined for decades. Although there is disagreement about the likely pace of future declines, consensus forecasts suggest continued improvement.

Table 1 shows life expectancy estimates for men and women born in various birth cohorts between 1900 and 2000. Life expectancy for a male born in 1950 is estimated to be 73.7 years. As many of those born in 1950 are still alive, and these survivors are currently 65 and 66 years old, estimates of life expectancy depend in part on projections of future age-specific mortality rates. These projections suggest that remaining life expectancy for a man who celebrated his 65th birthday in 2015 is 19.3 years.

The entries in Table 1 show that during the last century, life expectancy at birth for males rose by about 30 years. For females, the increase was somewhat smaller, about 27 years. Life expectancy for a 65-year-old man increased by about nine years, and for a woman by around three years. The chance that a newborn male in 1900 would reach age 65 went up by about 40 percentage points; the change was about 35 percentage points for females.

To offer another perspective on changing late-life mortality rates, Table 2 shows the age at which there is a 20 percent chance that someone who reached age 65 would still be alive. The table presents this information for various cohorts. The table shows, for example, that if a woman born in 1900 reached age 65, she would have a 20 percent change of living beyond the age of 91. Mortality rate projections suggest that for a woman born in 2000 who reaches 65, the analogous age will be 96.6 years.

The probability of living for many years beyond age 65 has risen sharply. For the 1900 birth cohort, there was almost a 20 percent chance that a man would live to 86 if he lived to 65. For the cohort born in 2000, mortality rate projections suggest a 20 percent chance of almost reaching 95 conditional on reaching 65.

The second component of demographic change is the decline in fertility. The two decades after World War II were a period of unusually high fertility, particularly in comparison to more recent decades. Figure 1 shows the historical U.S. fertility rate since 1900, along with projections from the Social Security Administration (SSA) of fertility rates through 2050. …

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