The young tend to spend more on products. Think of buying a home and then needing to (eventually) add furnishings, kitchen utensils, laundry machines and so on.
The old tend to spend more on services. Think, especially, health care, but it may include other services. For example, when I have had elderly neighbors, they have been the neighbors who hire weekly lawn and garden services. Services may be more labor intensive (for now) than products (think automated manufacturing). As the population ages, we may see more demand for labor intensive services just as there are fewer workers to provide those services.
Supposedly, an expanding population leads to more innovation – based on the idea that there are more people potentially doing more things, leading to more innovation.
In a shrinking population, we see a declining economic growth rate and productivity rate. Many think that as the population shrinks, the productivity rate will worsen.
I differ on this point: specifically, we are at a point in time where automation can now be applied to vastly more functions than it was in the past, particularly with regards to adopting techniques from machine learning and robotics and applying them to a variety of real-world scenarios. In addition, the costs of automation, versus the past, have fallen sharply. Think of the impact made possible by cheap microcontrollers, servos and motors and sensors – now we can readily automate functions at low cost. We are on the precipice of a huge advance in automation – and we will see automation across many sectors (including services) that have not benefited in the past. The use of automation will likely reduce much labor, thereby leading to an increase in productivity.
How do we address shrinking populations?
Import more immigrants: This report suggests (the usual) – increase immigration (except as I note, every country thinks it can import workers from abroad, and while some countries may be attractive destinations, this solution cannot work for all countries when the population issue is global). The idea is “open labor markets” (like open or free trade). Net migration to the U.S. peaked in about 2016 and today has fallen to a fraction of its 2016 level.
Expand social benefits: This report also suggests we need larger social benefits programs to encourage families to have children. Except these programs, in place for decades in the Nordic countries, have not worked to accomplish this in those countries – all but one country has fertility rates lower than the U.S. But they do have subsidized childcare and education and other benefits. These programs have not worked, and if implemented in the U.S., would need to be paid for with higher taxes.
Retire later and older: “Experts” say we need to encourage older workers to continue working beyond our contemporary notion of when to retire. (Note – some fields have intense age discrimination which discourages active participation). There are proposals to raise the general retirement age, which many still think of as age 65, to age 70. In fact, for those born after the late 1950s, Social Security full benefits do not kick in until age 67; this will likely be raised to age 70 and perhaps even higher. A higher retirement age does not only reduce spending on Social Security, but it also keeps workers earning money and paying into the Social Security Trust Fund for more years.
Means tested pensions: I believe most workers in the U.S. no longer have pensions in the traditional sense. They likely have social security and may have independent 401k or IRA retirement accounts, plus savings and investments. In the case of pensions, social security, or Medicare, “means tested” means recipients would receive less money if they have saved too much for retirement and/or receive income from other sources. For example, the monthly fees for Medicare go up (quite high, in fact) for those whose income is higher.
Wealth taxes: Those who have saved more for retirement should have their wealth taxed and redistributed to others. Oxfam also says we should tax the wealth of those who have saved at a 2% annual rate, regardless of return on investment. During recessions, this would confiscate their wealth. Some European countries already have wealth taxes on total assets as low as about US$200,000.
A popular argument is that older persons tend to have more assets than younger, therefore, older persons should have their retirement funds confiscated and redistributed. Logically, because older persons have, likely, had more years to save and invest, they have more assets than workers just starting out yet “A key message is that age is a significant source of inequality: The largest and youngest groups hold the least wealth—those under 35 years of age (blue line) represent over 25 percent of the population but hold only about 5 percent of total wealth.”
Some view this as unfair and believe wealth should be taxed and those who chose to live frugally, save, invest and postpone life experiences until later, should see their assets reduced and redistributed to those who chose not to save or could not save. Setting up wealth taxes creates moral hazard that many may stop saving for future retirement and instead plan to become dependent on future governments to bail them out.
(Note – an NBER paper found most professional class workers over save for retirement – and they should have spent their money when younger on important life experiences, including experiences they may not be able to get when older. This group may find itself in the crosshairs of the wealth tax advocates – and find themselves now targeted for over saving and forgoing life experiences and then denied those experiences when they retired – caught in the midst of this time warp of evolving fiscal policies.)
Many accumulated assets are driven up in $ value due to devaluation of the currency, which occurs when the government does the equivalent of printing money. Wealth taxes give an incentive for governments to print money and keep inflation high.
Asset Valuations: Post Covid-19, about 50% of those age 55+ are now retired. This is due in part to Covid policies that laid off and furloughed workers (see below) and also the perception that asset values climbed in value. They did climb, in $ denominated valuations, but this partially due to inflation – or stated the other way, the declining value of the $. The home retains roughly the same value as before – but the dollars required to buy it now are far higher because each $ is worth less. In other words, the illusion of greater assets makes us feel richer and enables us to retire sooner.
Voluntary spending: Perhaps those who are older and have the resources should be encouraged to spend more of it on useful goods and services (for example, purchasing solar PV, home insulation upgrades or EVs to reduce carbon output), or to voluntarily donate funds to organizations that could put funds to productive use, including spending on goods and services. Governments tend to prefer coercion over voluntary actions, however.
Health care: An estimated half of health problems are said to be due to “lifestyle” diseases. Lack of exercise. Smoking. Excess alcohol or illegal drug usage. And the big one: obesity (and poor dietary practices), which may lead to diabetes, lower body joint problems, heart disease and more. Popping pills is our traditional response but these largely treat the effects and not the root cause.
Covid-19’s impact: We are faced with the recent effects of Covid-19 pandemic mismanagement which led to early retirements as well as some older workers choosing to leave the workforce for fears of contracting Covid. The labor force participation rate for those age 55+ dropped sharply during the pandemic policy era and has not recovered. This opposes the idea we should have older workers stay on the job, longer. Many who lost jobs chose not to rejoin the workforce and some who wanted to, were unable to find employment that appealed to them. Thus, right at the start of this, we’ve pushed more older workers out of the labor force and they are not coming back.
Abrupt shift in retirement thinking: In the 1970s onwards, as the labor force was glutted with young new workers, many of our institutions encouraged early retirement to clear the way for younger workers. See also the age discrimination, above. There has long been a view that older workers are dated, not capable of learning new ways, and probably obsolete. If you have read my blog here, you know that only about half of U.S. adults in the 1960s had graduated from high school – just as the young were rapidly earning college degrees. Older workers were less “school educated’ yet likely learned much “on the job”. But our institutions favored academic qualifications over experience, leading to the oft stated phrase that many organizations were loaded down with “dead wood” older workers.
Medicare coverage: When a worker continues working past age 65, the employer must fund their health insurance. This gives an incentive to employers to not hire older workers.
Increase Federal spending and taxes: Retirement Security for an Aging Population Requires Higher Federal Spending | House Budget Committee Democrats. This also requires higher taxes – or just more money printing and inflation, which is a tax on everyone.
Automation: Hardly anyone mentions this but … we can and must increase the degree of automation we apply to many goods and services. This would create economic opportunities for those who design, build and implement automated services and lead to productivity improvements. This in turn would lead to a higher quality of life. But this idea seems not to be mentioned by the “experts”.
Update – this post was first made on Sep 4th and then substantially edited and cleaned up on Sep 5th. It still says the same thing as before but is better written and adds links to some supporting background.