Opinion

Time to retire fears over aging populations

Productivity growth makes worries over worker-retiree ratios unnecessary

January 27, 2014 7:30AM ET
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One of the recurring canards in Washington policy debates is that the United States has an aging population that is going to bankrupt our children and grandchildren. According to this tale, an increasingly small number of workers will have to support an ever-growing number of retirees, which will impose an enormous hardship on our descendants. This argument is put forward to justify cutting back Social Security, Medicare and other social protections.

This story makes demonstrably little sense in the context of the U.S. economy. As for the rest of the world, The New York Times reported last week on an effort at Davos to export this story to China and other Asian countries. This is unfortunate, since it makes even less sense in these countries. It’s worth reviewing some simple facts and arithmetic to clear up confusion.

First, aging populations are not new. The United States and other wealthy countries have been seeing aging populations for centuries, as increases in living standards and improvements in medicine have led to longer life expectancies. This has meant a growing population of retirees relative to the number of people working.

The D.C. fearmongers point to projections showing the number of workers per Social Security beneficiary falling from 2.8 his year to just 2.1 in 2035. But this prospect looks considerably less scary when we consider that the number of workers per beneficiary was 5.1 back in 1960. We have seen this number cut almost in half over the last five decades, yet both workers and retirees have seen substantial increases in their standard of living.

The logic here is simple: Productivity growth has allowed workers to produce far more today than they did in 1960. According to the Bureau of Labor Statistics, productivity is more than three times as high today as it was in 1960. This means that for every hour worked, a worker in 2014 on average produces three times as much by way of goods and services as did a worker in 1960. This is the reason that both workers and retirees can enjoy higher living standards even though there are fewer workers to support each retiree.

We should expect this to continue to be the case. Even if productivity grows at only a 1.5 percent annual rate, the same rate as in the productivity slowdown from 1973 to 1995, output per hour will still be almost 40 percent higher in 2035 than it is today. If productivity grows at the same 2.5 percent rate it sustained from 1995 to 2007, output per hour will be almost 70 percent higher than it is today. 

There is no basis for concern that an aging population will prevent future generations from enjoying much higher standards of living than workers today.

While economists’ track records in predicting productivity growth have been abysmal, the talk of robots displacing massive numbers of workers implies productivity growth that is even more rapid than this 2.5 percent rate. In that case, we will have no problem whatsoever supporting a far higher ratio of retirees to workers than will ever exist in the world. Our problem will be finding work for people to do, since the robots will be doing all the work for us.

In fact, raising demographic fears in the context of China is similar to the robot story. China has seen an incredible increase in its productivity since 1980. As a result, its per capita income is more than 17 times as high today as it was in 1980. This increase has taken place over the working lifetime of those about to retire.

This sort of extraordinary income growth means that the country will have no problem providing these retirees with pensions that are much higher than what they earned during their working life while still leaving future workers with wages that are far higher than their parents’. The gains in productivity swamp the potential impact of a falling ratio of workers to retirees.

The arithmetic on this is straightforward, even with the rapid drop in the ratio of workers to retirees projected for the next two decades. In fact, it would take productivity growth of just 0.4 percent annually over this period to keep after-tax wages constant, assuming that benefits for retirees cost 75 percent of the average after-tax wage. (Note: The average Social Security benefit is 40 percent of the average wage.)

The United States has never seen two decades of such slow productivity growth. And after 2035 the ratio of workers to retirees is projected to remain pretty much constant for the rest of the century while productivity keeps growing. In other words, there is no basis for concern that an aging population will prevent future generations from enjoying much higher standards of living than workers today.

The only circumstances in which an aging population could impose a real burden is if productivity growth ground to a halt. But in that case, the problem would be the failure of productivity to grow, not an older populace. It would take some pretty biased thinking to focus on the latter.   

There are in fact real threats to the living standards of our children and grandchildren. At the top of this list is inequality. If the pattern of income growth we have seen over the last three decades continues, with most of the gains going to the richest 1 percent, then most of our children will not fare well. Global warming also poses enormous threats to living standards, as a changing climate will make many areas uninhabitable and possibly lead to severe shortages of food and water in many parts of the world.

These are the sorts of issues that desperately need the public’s and policymakers’ immediate attention. The fact that people are living longer is not a problem.

Dean Baker is co-director of the Center for Economic and Policy Research and author, most recently, of The End of Loser Liberalism: Making Markets Progressive.

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera America's editorial policy.

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