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Beyond BLS

Beyond BLS briefly summarizes articles, reports, working papers, and other works published outside BLS on broad topics of interest to MLR readers.

January 2024

Demographic change is a resource challenge, not a financial challenge

Summary written by: Justin Holt

Current demographic forecasts project a decline in the worker-to-retiree ratio during the 21st century because of increasing longevity and decreasing births. Some social science researchers argue that providing for an aging population may become financially unsustainable because of these demographic changes. For example, a 2023 report by S&P Global forecasts that net governmental debt will reach 102 percent of gross domestic product in advanced economies by midcentury. If governments do not begin to decrease their debt ratios, then the report finds that these nations may have their credit ratings reduced to BB+ or lower. Commonly recommended solutions to this financial shortfall are a combination of increases in the minimum retirement age, increases in taxation, and decreases in public pension payments.

Yeva Nersisyan, Xinhua Liu, and L. Randall Wray in “The unbearable weight of aging: how to deal with the ‘demographic time bomb’”(Levy Economics Institute of Bard College, Working Paper 1018, April 2023) argue that the challenge of changing demographics is a real-resource problem and not a financial problem. Real resources are worker productivity and materials. Nersisyan, Liu, and Wray show the importance of worker productivity with a thought experiment. Suppose that a retirement plan is fully funded; that is, all retirees receive the payments they are supposed to receive. Nevertheless, if workers are not productive enough to produce all the desired goods and services, then spending will bid up the price of these goods and services with inflation as the likely result. Taxes could be effective in this hypothetical example to limit demand and reduce inflation. But demand-limiting taxation will not produce more goods and services. Therefore, the actual challenge of demographic change is not a financial problem but a problem of real-resource availability.

Nersisyan, Liu, and Wray argue that if changing demographics are a real-resource problem, then the total dependency ratio is the relevant metric for economic feasibility. The total dependency ratio is the proportion of the population that includes both those age 65 and over and those under age 20 to the population ages 20 to 64. In the United States, the authors project that the total dependency ratio will increase from 0.72 today to 0.89 in 2075. But this percentage is lower than the past peak of 0.95 in 1965. Also, since the end of the 20th century, worker productivity in the United States has increased 60 percent. If this rate of productivity continues, then 2.2 workers in 2050 will produce the same amount of goods and services as 3.5 workers today.

Nersisyan, Liu, and Wray recommend that, today, nations should prepare for a demographic shift to include training and educating people, building physical infrastructure, pursuing scientific research, improving labor force participation, encouraging childcare activities by men, and maintaining full employment. In short, saving in financial terms to meet the needs of future young people and retirees will not necessarily produce the real resources needed for the care of people in the future.