Aging Population, Shrinking Economy?

Posted by CC Andrews

Sep 22, 2016 7:47:47 AM

Hung on the door of Bill Clinton’s Little Rock headquarters and originally meant as some levity for fellow campaign workers, campaign strategist James Carville made the phrase, “The economy, stupid,” a battle cry for the 1992 Clinton presidential campaign that still resonates today.elderly_hands.jpg

Reasons often cited for the current stagnant economy of the United States include debt hangover from the housing bubble, a slowdown of new technologies, and government over-regulation. A recent academic study from the National Bureau of Economic Research provides another explanation for the country’s lagging economic growth: an aging population.

“The fraction of the United States population age 60 and older will increase by 21 percent between 2010 and 2020,” says the study, which was coauthored by economists Nicole Maestas of Harvard Medical School and Kathleen Mullen and David Powell of the Rand Corp., a public policy think tank. “Our results imply that [Gross Domestic Product or GDP] growth will slow to 0.68% this decade and 1.28% next decade.”

A recent Washington Post article explained that from the 1950s to 2007, the U.S. GDP grew to about 3 percent per year. Since 2010, however, annual growth has averaged about 2 percent. Adding the paper’s dismal prediction of 1.2 percent annual growth lost to aging would keep the GDP at roughly 3 percent.

The rise of the U.S. population aging today is the result of a decline in the birth rate in the 1960s, which marked the end of the Baby Boom era, and the long-running decline in mortality rates. While it is becoming widely recognized (as highlighted in a previous blog) that Baby Boomers are a consumer force to be reckoned with, the new study paints a gloomier picture. Using 1980, 1990, and 2000 Census data and 2009-2011 American Community Surveys from the Census bureau to compare U.S. states with fast- and slow-growing populations, this study finds that states with the fastest increases in the elderly had the poorest economic performances.

The paper suggests that only one-third of the economic slowdown can be attributed to slower labor force growth. Curiously, the remaining two-thirds is due to reduced worker productivity—workers young and old have become less efficient. However, no clear reason is given for the latter finding. The paper postulates that the best workers may be leaving the workforce, despite other studies claiming that the most skilled older workers stay in their jobs longer.

Aging populations in other countries have produced similar results. Take, for instance, Japan, which has the highest percentage of people age 60 and older (35 percent), according to the United Nations. The aging of the Japanese population is due to its low fertility rate (about 1.4 children born to each woman) as well as its highest life expectancy (87 for women, 80 for men). In 2014, sales of adult diapers surpassed those of baby diapers. The country's economy is currently at a tailspin, with a GDP of 1.4 percent.

East Asian countries, such as China and South Korea are following suit. A recent World Bank report predicted that shrinking labor forces in these two countries will increase health and pension spending, as well as wreak havoc on their respective annual economies.

Europe’s economy is also not immune. A similar labor shortage caused by an increasing aging population in Austria, Germany, Greece, Italy, Spain, and Sweden will depress the E.U.’s annual growth by 0.4 percentage points from 2000 to 2025, states a study from the Organisation for Economic Cooperation and Development.

The World Economic Forum’s Global Agenda Council on Ageing predicts that over the next four decades, “rapid ageing of populations will be one of the most powerful transformative forces affecting society … This will have a significant impact in areas such as social welfare, public health and economic prosperity.”

As if it hasn’t been said enough—the aging of our population will have a momentous affect on all aspects of society. What’s more, aging guru Ken Dychtwald, PhD, may disagree with these studies’ conclusions, as a previous post in this space indicates.

Whatever the future holds, it’s important to be aware that an aging population will create a longevity economy that has the potential to be a tremendous asset to our society.

Topics: Aging, longevity economy, baby boomers