Cost of Aging

AuthorRonald Lee and Andrew Mason

Cost of Aging Finance & Development, March 2017, Vol. 54, No. 1

Ronald Lee and Andrew Mason

As populations in richer nations get older, GDP growth slows, support costs rise, and government budgets feel pressure

An aging population and slower labor force growth affect economies in many ways—the growth of GDP slows, working-age people pay more to support the elderly, and public budgets strain under the burden of the higher total cost of health and retirement programs for old people.

Yet an aging population may raise the amount of capital per worker, which would boost wages and output per hour worked (productivity) and reduce interest rates as higher wages lower the return on capital. Alternatively, population aging and slowing labor force growth could lead to secular stagnation if firms are discouraged from investing abundant loanable funds.

Economic growth is slowing in advanced economies at least in part because the end of the baby boom led to a decline in population and labor force growth—despite immigration. Many empirical studies have found that GDP growth slows roughly one to one with declines in labor force and population growth—a disquieting prospect for both the United States and Europe.

In the United States, during the 40 years from 1975 to 2015, the 20- to 64-year-old population grew 1.24 percent a year, but is projected at only 0.29 percent for the next 40 years. That should lead to a corresponding decline in the growth rate of GDP and aggregate consumption. Many advanced economies already have a declining working-age population—in Europe it will fall more than 20 percent between 2015 and 2055, with an attendant decline in GDP growth.

Per capita output matters But individual well-being depends not on aggregate, but on per capita, growth. Standard growth models predict that slower population growth also leads to rising output and wages per worker. The underlying question is whether this higher output per worker will translate into higher per capita income. That will depend on how much, as the population ages, increased productivity offsets the rise in the number of dependents (old and young) per worker.

To answer that question, we look more closely at how economic activity varies by age, drawing on national transfer accounts, which measure how people at various ages produce, consume, and save resources (NTAccounts.org; Lee and Mason 2011; United Nations 2013).

Children consume more than they produce, and the same is true on average for the elderly...

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