Without more younger workers, retirement to lose its luster

The United States used to be the only big, rich nation to have above-replacement fertility. That stopped being true during the Great Recession, and birthrates keep slipping. The latest data put expected lifetime fertility at about 1.6 births per woman, a record low — before the pandemic.

Yet President Joe Biden’s new budget, which proposes massive deficits for the rest of the decade, is a proposition for a young country whose best growth years are still ahead. By 2031 the national debt is expected to reach 117 percent of gross domestic product, and interest payments are forecast to run more than $900 billion a year — about 14 percent of all projected tax revenue, up from the 7 percent for 2022.

Running up debt like this signals one of two things: desperation in the face of an existential threat, such as a pandemic or world war, or a bet that incomes will grow even faster than the debt, so that over time it gets easier to service obligations. That’s why people tend to borrow most when they’re young, with fewer assets and lower incomes but high expectations.

We’re not expecting another pandemic soon, and I hope we’re not preparing for World War III. Yet these demographic facts make extremely rapid economic growth almost as unlikely.

At some level, GDP is a product of simple multiplication: the size of the workforce multiplied by the average productivity of workers. We can quibble with definitions — aren’t parents at home with children doing real and valuable work? Aren’t environmental goods like reduced pollution an important part of rising living standards? Yes and yes.

But even if we broaden our notions of economic growth, production of anything equals hours worked times hourly output. So if you want more output, you need more workers or higher productivity.

Can we get more workers? Politically, immigration has become tricky, and since birthrates are falling worldwide, it’s at best a temporary solution. We may have to figure out how to make a modern economy work without the population growth economies historically depended on.

Which brings us back to debt, which fuels so much economic activity, and not just loans or bonds: Social Security is a kind of debt. Even if you are “debt-free” and possessed of a comfortable pension or sitting on a fat portfolio of stocks and bonds, you are betting that some stranger will make their interest payments or provide dividends to their shareholders, even if that means they have to tighten their own belt.

That bet is more likely to pay off if the economic pie is growing. Public pension systems that were a great deal when five workers supported each retiree out of their rapidly increasing paychecks became burdensome as income growth slowed and the ratio dropped toward 3- or 2-to-1. Such systems will probably become untenable if the ratio falls much lower. And that’s fundamentally true of other kinds of retirement savings: If corporate incomes are stagnant, pension funds and 401(k) holders will be dividing a fixed pool of dividends, interest and capital gains. Even public pensions could be in jeopardy if it comes down to a choice between paying them and staffing schools or sweeping streets.

Yet falling birthrates also make it harder to achieve the growth needed to keep living standards from falling. Younger people drive a lot of economic and scientific dynamism; U.S. states with younger labor forces seem to have more productive firms. Of course, experience and business acumen count for a lot, which is why entrepreneurship peaks in people’s 40s. In an aging society, the surplus of older workers may monopolize the positions where such experience is acquired.

Nothing can grow forever; it’s possible we’ve reached the inevitable point where decline sets in. But if so, we’d better prepare for it, rather than spend like a young kid with a bright future ahead.