Aging may be bad for the economy

WASHINGTON — An aging America reduces the economy’s growth — big time. That’s the startling conclusion of a new academic study and, if it withstands scholarly scrutiny, it could transform our national debate.

We’ve known for decades, of course, that the retirement of the huge baby boom generation, coupled with low birthrates, would make the United States an older society. Similarly, we’ve known that this would squeeze the federal budget. Social Security and Medicare spending would grow rapidly, intensifying pressures to cut other programs, raise taxes or accept large budget deficits. All this has come to pass.

But the new study goes a giant step further, claiming that the very fact that the United States is an aging society weakens economic growth. “The fraction of the United States population age 60 or over will increase by 21 percent between 2010 and 2020,” says the study. This aging shaves 1.2 percentage points off the economy’s present annual growth rate, the study estimates.

Although this seems small, it’s enormous. Consider the numbers. From the 1950s to 2007, the economy — gross domestic product — grew about 3 percent a year, sometimes a little more, sometimes a little less. By contrast, annual growth since 2010 has averaged about 2 percent. But add in the 1.2 percent annual growth lost to aging and we’re roughly at 3 percent growth.

To say the same thing differently: If other economists confirm the study, we’d probably resolve the ferocious debate about what caused the economic slowdown. The aging effect would dwarf other alleged causes: a lag in new technologies; increasing economic inequality; debt hangover from the housing bubble; over-regulation by government; heightened risk aversion among shoppers and firms, reflecting the legacy of the Great Recession.

In effect, demographics rule. The theory’s added appeal is that it might apply globally, because almost all advanced countries are experiencing both aging populations and slower economic growth.

Still, it won’t be easy to convince other economists that aging explains most of the economic slowdown. Probably, the theory will strike many as too simple.

Co-authored by economists Nicole Maestas of Harvard, and Kathleen Mullen and David Powell of the Rand Corp., a think tank, the study on aging compared U.S. states with fast- and slowgrowing elderly populations. States with the fastest increases in the elderly also had the weakest economic performance. These relationships then formed the foundations for the study’s broader conclusions.

Generally, aging poses two possible adverse economic effects. One is uncontroversial. As swarms of retirees leave the labor force, there are relatively fewer workers to support production. This hurts economic growth, but it represents only one-third of the slowdown, the study estimates. The other two-thirds reflects reduced productivity; workers become less efficient. Not just older workers — all workers. That’s surprising and there’s no clear answer as to why. This is the study’s weak point. The conclusion rests on data points that can’t be explained.

There are theories. It could be that, as experienced workers retire, their positive effect on the work climate is lost. “If I’m working with someone who is relatively unproductive, I may become less productive [myself],” says Powell. Although this is plausible, it’s also guesswork, as Powell admits. It’s also partly undercut by Burtless’ research, which found that the most skilled older workers stay in their jobs longer.

Or it may be that, as societies age, they become more cautious. Their members value stability and security over ambition and adventure. They’re more restrained and realistic, and less experimental and optimistic. If these values strengthen as people age, they may impose a stand-pat and conservative bias on businesses and households.

On the whole, the study is bad news. One way that advanced societies can handle aging populations is through faster economic growth, which enables younger generations to pay the elderly’s benefits without sacrificing too much of their own incomes. But if aging is a cause of slower economic growth — even if the impact is less than the study suggests — then this avenue is of limited help.

As a society, we need a better balance of obligation between the older and younger generations. Until now, policy has favored the elderly. The remedies to shift the balance are well-known: higher eligibility ages for government benefits; less generous benefits and tax breaks for wealthier retirees. None is politically easy.