Demographics: The Non-Crisis Of The Dependency Ratio

It is stylish to wring one’s hands close the impending demographic crisis that is close to hitting the developed countries, at to the lowest degree alongside those who desire to live seen every bit serious. There is no uncertainty that social programmes volition demand to alter over time, but that should non live a shock: ane of the definitions of something beingness dead is that it does non react to changes inward its environment. In this article, I facial expression at the demographic province of affairs for the United States, in addition to offering a high flat explanation why it is non specially worrisome. In monastic enjoin to live brief, I am looking only at the capacity to create existent goods in addition to services here, in addition to non the fiscal measures that are the park justification for panic.

Yes, The Number Of Old People Is Rising

The charts higher upward is close the “scariest” ane I could come upward up with for the demographic outlook. It shows the per centum of the population that is 55 years or older. It is ascension inexorably, higher, in addition to the park worry is how tin send away nosotros provide for all of these people?

However, this is only looking at ane component subdivision of the situation. The flip side of the aging population is that at that topographic point are people who below the working age.

The nautical chart higher upward shows the per centum of the population that is inward the “prime working age”: 25- to 54-years old.  (The historical information in addition to the census projection do non draw up; I assume that this is the number of the exclusion of the institutional population inside the BLS information serial I used.) Although this per centum volition drib going forward, it was truly lower inward the mid-1960s. Ultimately, the “dependency ratio” (the ratio of “non-working ages” to “working ages”; shown below) is non hitting about extreme flat that volition brand it impossible to provide for societal needs.

One could debate that children are expected to live provided for past times their parents, whereas retirees depict Social Security in addition to pensions. But gild every bit good has to pay for education, in addition to many retirees volition depict downwardly housing, retirement in addition to pension assets, in addition to those transactions volition generate considerable taxation revenue for the government.

Coping Mechanisms

There are a number of ways inward which gild could constructively accommodate to an older population. (That does non dominion out highly destructive policies, such every bit nosotros encounter inward Europe. Policymakers at that topographic point conduct maintain managed to devastate their economies without requiring assist from demographic trends. I travel out it to the reader to gauge whether the policies elsewhere inward the coming decades volition live improve or worse.)

• People tin send away piece of work longer than they had planned. Given the widespread failure of market-based retirement provisioning, this is happening already.
• The economic scheme tin send away render to something closer to total employment, eliminating widespread underemployment. Production does non depend upon how many people are inward the 'working age' demographic; it depends upon how many of these people are employed. This lonely could compensate for a large proportion of the projected demographic shift.
• A to a greater extent than sensible mental attitude could accept concur inward higher education; students would non pass years inward academy to terminate upward working inward a café. The “requirement” to conduct maintain a Master’s flat for jobs that were previously filled past times undergraduates volition disappear. By spending less fourth dimension inward educational institutions, people volition terminate upward with longer working lives.
• Many marginal businesses that tin send away only afford to pay depression reward volition live culled, redeploying workers to to a greater extent than productive employment. Society could terminate upward with roughly the same "volume" of output, but at the cost of a decrease inward the multifariousness of products in addition to services available. (This fits inward with a post-Keynesian persuasion that capitalist firms display considerable economies of scale; demand mostly constrains output, non declining marginal productivity. These economies of scale do non ever exist, such every bit inward resources extraction.)
• Rich developed countries with ageing populations tin send away merchandise for goods in addition to services produced past times poorer countries with younger populations. (This is already happening, specially inward the States of America with its structural merchandise deficits.)

If the labour marketplace position were properly functioning, these adjustments would laissez passer on naturally every bit it tightens due to demographic pressure. That said, at that topographic point is no sign of this happening yet. Although capitalist economies are meant to live populated with forward-looking firms, inward practice, management is myopic in addition to only responds to short-term toll signals. (The ongoing overproduction of unsmooth fossil oil past times high cost producers at a loss is the latest lawsuit of how short-term thinking wins over long-term planning.) Therefore, at that topographic point is no argue to facial expression adjustments to occur straightaway inward reply to pressures that volition appear inward coming decades. I am non hugely optimistic that whatever transition volition live easy, but reality volition eventually forcefulness a solution of about sort.

What About Social Security?

I am going to avoid proverb anything detailed close Social Security here. The topic has been highly politicised, in addition to a fair amount of nonsense has been thrown around. It is solely possible that the programme volition demand to alter parameters every bit fourth dimension passes, but my kickoff transcend analysis seems to signal that the changes demand non live real large.

Much of the analysis of the programme takes house using the fiction that Social Security tin send away live analysed every bit would a corporate pension plan. We cannot analyse the U.S. Federal Government every bit if it were a business; nosotros conduct maintain to analyse regime finances past times looking at the aggregate conduct of the economic scheme (I hash out this inward the context of regime pensions here).

In whatever event, nosotros cannot carry goods in addition to services through time. Therefore, nosotros cannot do real much inward 2015 close shortages of goods in addition to services that may larn inward in 2060. (Investing supposedly would help, but at that topographic point are real few technology scientific discipline structures that volition last that length of time.)

I facial expression that I volition facial expression at the fiscal aspects of demographics inward after articles. In particular, how volition retirement property holdings interact with regime debt ratios? However, the give-and-take of these fiscal aspects are secondary to what matters: the provision of existent goods in addition to services. And every bit the dependency ratio projections higher upward show, at that topographic point is no argue to believe that goods in addition to services volition live inward curt render based on demographic factors lonely [update: typo fixed]. (One may reasonably enquire what the sources of loose energy for transportation volition live inward 2060, but that has lilliputian to do with demographic angst.)

(c) Brian Romanchuk 2015