By Sam Gutterman
Let’s face it: we’re all getting older. This process applies not only to you and me but also to societies. Actuaries, demographers, and economists have discussed population aging for decades, but it is now making a material difference in numerous ways.
It is already affecting countries such as Japan and Italy—in their economies, businesses, and public services. In extreme cases, nursery schools are being converted into geriatric care facilities, and small rural towns are disappearing. The ratio of benefits to contributions in national pay-as-you-go retirement programs is rising, and health care costs will increase faster than inflation, with the pace depending on each country’s stage in its demographic transition from high mortality/high fertility to low mortality/low fertility.
Declining fertility and rising life expectancy are driving dramatic population aging worldwide, with population decline already underway in some areas. The net effects of these forces pose fundamental challenges to the sustainability and adequacy of retirement, health care, and other social programs.
Although period fertility is at an all-time low in many countries (in the United States, now somewhat below 1.6 children per woman), some have argued that the tempo effect (women having children at older ages) means that true fertility isn’t as low as period fertility statistics suggest. However, the fertility rate among women in their 30s and early 40s has also decreased somewhat over the last decade; the rise in the average age of mothers at birth is being driven by significantly fewer births among teenagers and women in their twenties. Total fertility rates are just as likely to continue declining as to increase—no country has yet managed to sustain an increased level of fertility, even though more are spending a lot of money trying. And the growing sex imbalance in higher education may exacerbate the fertility situation and raise additional sociological issues.
The solution to this conundrum of population aging and decline in some countries could be to increase immigration. However, the emotional response can be considerable, and the return on investment from immigrants can take a generation to materialize. How much return did my immigrant grandfathers, a shoemaker and a house painter, earn? I’m confident that immigrants can add significant value. But, given the current political environment, this source should not be relied upon.
Not only is the labor supply in certain economic sectors beginning to decline due to a shortage of immigrant labor, but the overall economy and the financial support for Social Security and Medicare may also suffer. Perhaps the solution lies in artificial intelligence to address our productivity shortfall and, as with prior technological waves, to facilitate more effective use of both personal and societal resources.
Mortality is another key demographic factor driving population aging. I trust it will continue to improve—many actuaries are banking on it. Smarter behavior and technology may accelerate healthy aging more than overall aging, improving our ability to cope. Nonetheless, our focus will shift to a greater emphasis on care for older adults.
If the theory that innovation and societal dynamism diminish as a population ages is correct, it points to another problem. How much of the Japanese economic malaise of the last several decades has been the result of its advanced population aging?
Although I have focused on the number of people, the stock of human capital may be more important for macroeconomic growth. Effective investments in education, foundational research, and workforce development will enable innovation and economic growth.
Most segments of our economy are geared toward a young, growing, vibrant population. I don’t know all the ramifications of a declining and aging one.
Yet what should be done? Or maybe aging isn’t all that bad—just something to take advantage of, or maybe there are too many people on the planet anyway. When I put on my environment hat, I’m OK with a somewhat smaller population.
It isn’t the extreme situation I am concerned about, as I am mildly optimistic about our ability to adapt and overcome many age-related problems. However, changes in societal attitudes will also be needed, whether at the global, national, or community level. In some areas, these problems will likely take the form of the frog in a boiling pot—aging is a slow process, but its effects will be monumental when the boiling pot (reality) hits home.
SAM GUTTERMAN is chairperson of the Social Security Committee and member of the Retirement Practice Council.