The Impact of the Demographic Transition on Capital Formation
Alan J. Auerbach and Laurence J. Kotlikoff
The population of the United States is aging. As of 1990, about one fifth of the total U.S. population was over 55 years old. 1 In fifty years that figure will be close to one third. This aging will be particularly acute among the older old. Currently, those over age 75 represent only 5 percent of Americans. By 2040 this figure this projected to grow to about 12 percent.
At the same time that the elderly fraction of the population is increasing, the relative population of young people will be declining. While well over half the population was under age 35 in 1990, this figure is projected drop to just over 40 percent by the year 2040.
This aging of the population, which is attributable to declining rates of fertility and mortality, has a range of implications for the level and composition of national saving and capital formation in the United States over the next several decades. In this paper, we review a variety of these implications and discuss the policy issues that they raise.
In considering these issues, we will focus primarily on the United States. However, one should keep in mind that many other countries are simultaneously undergoing demographic transitions as strong or stronger than the United States. In Japan, for example, the demographic transition is occurring at a more rapid pace. Almost a quarter of the Japanese population is currently 55 or older; by 2010 almost a third of the Japanese population will be 55 or older compared with only a quarter of the U.S. population. The existence of such a demographic transition in many of the industrialized countries means not only that the lessons leaned for the United States may apply much more broadly, but also that the pattern of international capital flows that one might associate with a single