Even the most casual consumer of elite American commentary knows about the looming demographic crisis. The drumbeat of warnings that the United States and (more acutely) Europe face some sort of catastrophe due to stagnating or even declining populations has been steady and loud for years. Here in the United States, the defeat of the GOP's push to privatize Social Security has done little to crack the pundit consensus holding that our aging population will exert a crushing burden on the American work force in the future, through seniors' demands for entitlements and services.
Happily, we have nothing to fear but the fear mongers themselves. A simple look at the data shows that the much-feared specter of the baby boomers' retirement doesn't in fact portend any kind of fiscal or economic crisis. Indeed, one can go further: the prospect of declining populations (due to individuals' choice, not mass murder or coerced abortions) is actually great news.
Here in America, the story is that the retirement of the baby boomers will lower the ratio of workers to retirees from close to 3 to 1 at present down to just 2 to 1 in 30 years. While this fact is supposed to scare people, a bit of simple economics shows there is no real basis for concern.
Starting with the basic ratios, the rising portion of the population that is over age 65 will be at least partly offset by a declining portion of children in the population. The Social Security trustees project that the share of the population that is under age 20 will fall from roughly 30 percent in 2005 to less than 25 percent in 2035, offsetting close to one-quarter of the growth in the share of elderly. This means that to some extent, we will be simply shifting some of the resources from the young to the old.
But this shift is the less important part of the story. The more important part is productivity growth. We know that, barring an economic catastrophe, workers will be far more productive in 2035 than they are today. Technology will continue to improve, computers will get better, workers will be more educated. Even if productivity growth were to fall back to its slowest pace on record (1.5 percent annually), workers in 2035 would still be producing 50 percent more on average than workers do today. This means that two workers in 2035 would be as able to support a retiree as three workers are today. If productivity grows at the same rate as it has over the last decade (and during the period from 1945 to 1973), then workers will be almost twice as productive in 2035 as they are presently. In this scenario, two workers would be far better able to support a retiree in 2035 than three workers are today.
Even setting aside the productivity factor, the basic scare story of a labor shortage never made any sense to begin with. In Econ 101 we teach that when there is more demand than supply, the price (in this case wages) goes up. Rising wages will not frighten most people. (In fact, rising wages will pull many older workers back into the labor force.)
Of course, if wages rise, then some jobs will disappear. Workers will leave the least productive forms of employment and move to jobs where their labor will be more productively employed. Currently, 15 million people work in the retail sector — just over 11 percent of the work force. If labor becomes relatively scarce, then stores will have fewer retail clerks on the floor. Convenience stores might keep shorter hours. Are you scared yet?