Report

Does Population Aging Represent a Crisis for Rich Societies?

Gary Burtless

A common view among policymakers is that population aging represents a crisis for
industrialized countries. Because pensions and old age health insurance are largely funded out of
public budgets, increases in the percentage of the population past retirement age must eventually
cause steep increases in the fraction of government budgets devoted to old age consumption and
a rise in the level of public spending. According to one view, either taxes or government debt
will be pushed to unsustainable levels unless public programs are significantly reformed to
curtail retirement benefits.

This way of viewing the problem of population aging is highly misleading because it
treats aging within the narrow perspective of government budgets. In the United States, the
perspective is often even more distorted, because many analysts focus solely on aging’s impact
on the federal budget. Yet population aging also has notable impacts on state and local budgets
and an even bigger impact on private household spending. Some of these impacts represent
offsets to the effect of aging on federal government budgets.

Population aging is the result of two developments, lower birth rates and longer life
spans. Holding constant the mortality rate, lower fertility inevitably raises the fraction of the
population past any given age, including the retirement age. However, it also reduces the
percentage of the population below a given age, such as age 20. Both the old and the young are
dependent populations that derive most of their support from the current output of active
workers. Rich societies finance much of the consumption of the aged through public retirement
programs, while most (though not all) of the consumption of the dependent young is financed out
of private household budgets. Young labor force entrants also require public and private
investments to equip them to earn as much as average members of the working-age population.
Lower fertility reduces spending requirements for the young, a fact missed when observers focus
narrowly on the budgets of government old age programs. The apparent crisis connected with
population aging is partly an illusion stemming from a narrow focus on the spending needs of a
handful of public programs. If the full span of private as well as public burdens is taken into
account, the increase in the dependency burden appears much more modest.

Author

Longer average life spans also increase the percentage of the population past a given age.
If people value longer lives, this development unambiguously makes the population better off,
regardless of whether it increases the percentage of lifetime income that must be devoted to
consumption past the age of 65. If population aging represents a genuine crisis for present or
future generations, it must be the case that those generations will suffer a loss in lifetime net
income, possibly as a result of excess net contributions to support younger or older generations.
The paper will attempt to show the circumstances under which this outcome could occur.