This blog is intended to go along with Population: An Introduction to Concepts and Issues, by John R. Weeks, published by Cengage Learning. The latest edition is the 13th (it will be out in January 2020), but this blog is meant to complement any edition of the book by showing the way in which demographic issues are regularly in the news.

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Sunday, October 1, 2017

Will Older People Be The Death of Rich Countries?

I've often mentioned the "prediction" that China will grow old before it gets rich. But an even more pervasive theme in the media is that the rapidly aging population of the richer countries in Europe and North America is on the verge of bringing economic collapse. The concern is especially about the ability and/or willingness of younger people to pay the pensions for the older population, since most pension schemes of governments and businesses are pay-as-you-go plans, not real savings plans. This theme came up yesterday in a blog post from John Mauldin of Mauldin Economics. I regularly read his blog (which was recommended to me several years ago by one of my readers), as do a lot of other people, so we need to pay attention to his ideas, whether we agree with him or not.
Look what we’re trying to do. We think people can spend 35–40 years working and saving, then stop working and go on for another 20–30–40 years at the same comfort level – but with a growing percentage of retirees and a shrinking number of workers paying into the system. I’m sorry, but that’s magical thinking. And it’s not what the original retirement schemes envisioned at all. Their goal was to provide for a relatively small number of elderly people who were unable to work. Life expectancies were such that most workers would not reach that point, or would at least live just a few years beyond retirement.
As I have pointed out in past letters, when Franklin Roosevelt created Social Security for people over 65 years old, US life expectancy was about 56 years. If the retirement age had kept up with the increase in life expectancy, the retirement age in the US would now be 82. Try and sell that to voters.
No, don't try to sell that to anyone, because those numbers are not correct. When Social Security was passed in 1935, life expectancy at birth was 60 for males and 64 for females. However, that is not the number to pay attention to. The issue is how long people live past retirement, since those are the years of "dependency" that create problems for the economy. The Social Security Administration has calculated this for us. When Social Security payments started being made in 1940, the expected years of life after age 65 were 12.7 for males and 14.7 for females. The latest data available from the US Centers for Disease Control show that in 2013 life expectancy at age 65 was 17.9 for males and 20.5 for females. If we follow those numbers, then retirement should be about age 72, instead of 67 (which is the current age at which a person born in 1960 or more recently can receive full Social Security benefits).

And for those of you who want to raise the birth rate to "solve" the problem, remember that children are also dependents for twenty years or more. As I discuss in my book, one of the reasons for the implementation of Social Security in the U.S. was that young people needed jobs and this was one way to get older people out of the labor force to make room for the youngsters. Changes in the age structure are more important determinants of the pension crisis than is increasing longevity. The Social Security Administration reminds us that:
Increases in life expectancy are a factor in the long-range financing of Social Security; but other factors, such as the sheer size of the "baby boom" generation, and the relative proportion of workers to beneficiaries, are larger determinants of Social Security's future financial condition.
I am fully supportive of the current ideas for raising the age at which people can receive retirement benefits. People need to work longer, and they also need to save more. Of course, getting back to an economic environment in which the interest rate on a regular savings account is somewhere higher than zero would likely encourage more of that behavior. Finally, we need for Congress to remember that when there is a surplus in the Social Security Trust Fund, it is a pot of money for future retirees, not a pot of money to be spent right now on whatever you want--as happened, for example, during the Bush administration.

1 comment:

  1. "People need to work longer". I would be fine with that, except that the chance of finding a job after age 60 which won't result in significant under-employment and much lower salary is remote at best. Self-employed consulting is tough because the first $24-36,000 of revenue will be taken by health insurance premiums. And, I'm not sure that there will be much demand for my services after I hit age 70 - simply because my technical skills will be perceived to be too dated in relation to younger practitioners.