Key Points
As in many of the world’s developed nations, America is undergoing a momentous increase in the share of older individuals in the population, or “population aging.”
Population aging will continue throughout this century because of baby-boomer retirements, longer lifespans due to declining mortality, and fewer newborns from reduced fertility.
Sustained population aging will pose a significant fiscal challenge: How best to provide funding for adequately supporting older generations’ consumption and health care.
Population Aging
Introduction
One in five people are already older than 65 years in Japan, Germany, and Italy – currently the “oldest” nations in the world. The populations in China and South Korea are also aging at a rate that will make them the oldest in the world by 2050.
Figure 1 shows that America’s population age wave has not been as rapid as in some European countries. Slower aging in the United States is due to relatively higher American fertility and immigration rates after the 1960s. Nonetheless, while the median age in the United States was 37 in the year 2010, it is projected to increase to 41 by 2050. Moreover, the European experience — especially its rapid fertility decline — remains concerning as a potential outcome for the United States as well.
Figure 1: Percentage of Total Population Aged 65 and Older (Projected Value for 2030)
Source: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision.
Recent improvements in human longevity in America have also progressed at a fast pace. Advances include new medical discoveries, faster technological innovations, and better public health practices. If American fertility approaches the trend witnessed in Europe, and if American mortality improvements continue at their recent rapid pace, population aging could accelerate in America as well in coming decades.
Population aging implies that Social Security, Medicare, and other elder-support programs would require more funding than currently projected. The financial burdens of such funding increases must be borne by younger workers, creating a challenging task for policymakers: That of sustaining fiscal incentives to promote productivity, enhance saving, investment, entrepreneurship, and workforce engagement at a time when federal revenues must be increased or other federal spending commitments must be pared.
Population Growth: Fertility and Mortality
Similar to Europe, America experienced a fertility cycle where a post WWII fertility boom was followed by a fertility bust. As shown in Figure 2 , this boom-bust cycle created the hump in the current population’s age distribution. America’s aging slightly lags that of Europe, which has a larger share of the population at ages 60 and higher. However, Americans born between 1946 and 1964 are now in their fifties and sixties. About 10,000 Americans now begin to collect their Social Security benefits each day.
Figure 2: Population Distribution by Age: 2013
Source: PWBM calculations from Eurostat and the Current Population Survey.
If America’s population aging continues to approach the European pattern, pressures will mount on U.S. fiscal policy. Today, the Total Fertility Rate (TFR) in many developed countries is well below the threshold of 2.1 live births per woman over her lifetime, which is required to hold the population constant. For example, TFRs in Germany and Italy have plummeted to 1.4, which will speed up population aging in those countries as well. American fertility, however, has averaged slightly below 2.0 during the last three decades. While higher than fertility rates in Europe, it is still below the rate required for population replacement and a sizable future decline to European levels cannot be ruled out.1
At the same time, America's mortality rate is declining rapidly and contributing to the rate of population aging. As Figure 3 shows, The U.S. crude mortality rate was very stable during the 1990s, but has commenced a rapid decline during the 2000s. Indeed, the annual death rate has fallen from about 5,500 to about 4,500 per 100,000 individuals – a decline of almost 20 percent since year 2000.
Figure 3: Death Rate per 100,000 Individuals Aged 65 and Older
Source: Social Security Administration.
Diseases that were terminal in the past are now becoming preventable and treatable — improvements that appear likely to continue. According to the Social Security Trustees’ projections, the contribution of mortality improvements to population aging is expected to continue over the long-term, even after the baby boomers have passed away. The U.S. average life expectancy at birth currently stands at 79 years. It was just 69 years in 1950 and is projected to reach 84 by 2050.2
Figure 4: Life Expectancy at Age 60 for Both Sexes Combined
Source: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision.
Immigration
Traditionally, immigration helped reduce the pace of population aging in America. The influx of approximately 59 million immigrants after the Naturalization Act in 1965 helped to sustain fertility at higher levels. In fact, between 2009 and 2010, immigrant women gave birth to more children than U.S.-born women.3 Children born to at least one immigrant parent also doubled from 1990 to 2013.4 The share of these new immigrants and their offspring account for over half of the growth of the total population in the United States today.
Supporting the economic challenges posed by an aging population, however, requires more than having enough workers.5 The tax base is larger if those workers are more productive and are younger, thereby working for a longer period of time. As it turns out, immigrants are more likely to have advanced degrees compared to those born in the United States.6 Moreover, the U.S. has attracted younger immigrants during the past several decades. According to the U.S. Census Bureau, the median age of the foreign-born population was 57.3 in 1960 but it declined to 43.5 by 2014.
Population Aging and the Fiscal Challenge
The simplest way to understand the fiscal challenge that an aging population presents is to calculate the population's “old-age dependency ratio.” This ratio is equal to the population that is older than 65 years divided by the population aged between 15 and 64. The ratio shows the number of retirees that must be supported by each young adult beyond funding his or her own consumption. For example, if the aged-dependency ratio is 0.3 then each young persons's economic output must, on average, support 1.3 persons.
Figure 5 shows the population aged-dependency ratio for Europe and the United States. Notice that the aged-dependency ratio has just begun a phase of rapid increase that is expected to last for several decades. In Europe, however, the increase in the aged-dependency ratio is expected to continue well into the 2050s and to reach close to 0.5. Therefore, by 2050 each young individual in Europe will have to support 1.5 people. Put differently, each retiree will be able to obtain economic support from just two European young adults, on average. For the United States, the projection is a little less extreme: with the population age-dependency ratio plateauing at just below 0.4 each retiree will have three young adults for providing economic support, on average.
Figure 5: Old-Age Dependency Ratio
Source: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision.
As Figure 5 shows, projected increases of the aged-dependency ratio in the United States are not as steep as those for Europe. That comparison, however, is not good news: The economic challenges facing European economies will naturally spill over to the United States. Problems at home in Europe mean that the foreign direct investments in U.S. firms will likely fall, as will the appetite for U.S. debt. That leaves the U.S. funding its future obligations in a way that is more similar to a closed economy than as a large, and open economy.
Moreover, regardless of events in Europe, the United States face considerable challenges of its own. Social Security, Medicare, and Supplemental Security are the key programs in the U.S. for supporting retiree consumption and health care benefits. In addition, numerous smaller federal programs award funds to states to provide assistance for the elderly. These include programs to aid independent living within communities, provide nutrition services, long-term care assistance, housing, energy, nursing, and other services for the elderly. All of these programs will become more difficult to finance as the relative size of the working population shrinks.
Conclusions: Where Do We Go From Here?
At first glance, it seems reasonable to believe that we could potentially “grow our way out” of these challenges. However, by law, Social Security benefits increase with worker earnings. As a result, the boost from higher productivity to government revenues will be offset by a similar (but delayed) boost to future benefit commitments. Greater productivity will also likely impact Medicare as well, which has been generally associated with faster cost growth.
However, the challenge of funding Social Security, Medicare, and other social support programs for the elderly would become easier if older workers adjust to lengthening lifespans by remaining active in the workforce for longer. Older workers are healthier today in comparison to earlier decades, making this adjustment potentially viable. Healthier aging promotes longer careers and generates more federal taxes, including payroll taxes that are dedicated to funding elder-support programs. They also do not increase benefit commitments by the same amount because Social Security’s benefit formula provides smaller returns to late-career earnings for those with longer careers.
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See PPI Background Brief on Fertility for detailed information about fertility declines in Europe and America: http://www.budgetmodel.wharton.upenn.edu/issues/2016/1/7/the-economic-determinants-of-fertility-choices ↩
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See PPI Background Brief on Mortality for more detailed information: http://www.budgetmodel.wharton.upenn.edu/issues/2016/1/25/mortality-in-the-united-states-past-present-and-future ↩
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Elizabeth M. Grieco et. al., “The Foreign-Born Population in the United States: 2010,” American Community Survey Reports (May 2012). Available at: https://www.census.gov/prod/2012pubs/acs-19.pdf. (See page 9). ↩
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The share of children from immigrant families were 13.4% in 1990 and 25% in 2014. For more information see: “Children in U.S. Immigrant Families,” Migration Policy Institute Data Hub, available at: http://www.migrationpolicy.org/programs/data-hub/charts/children-immigrant-families?width=1000&height=850&iframe=true ↩
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See PPI Background Brief on Immigration for more detailed information on how immigrants can help overcome these challenges: http://www.budgetmodel.wharton.upenn.edu/issues/2016/1/27/the-effects-of-immigration-on-the-united-states-economy ↩
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“Modern Immigration Wave Brings 59 Million to U.S., Driving Population Growth and Change Through 2065: Views of Immigration’s Impact on U.S. Society Mixed,” Pew Research Center (September, 2015). Available at: "http://www.pewhispanic.org/files/2015/09/2015-09-28_modern-immigration-wave_REPORT.pdf ↩
,1990,2010,2030 Italy,14.8,20.4,28.6 Germany,14.9,20.6,28 United States,12.5,13,20.7
,European Union,United States 0,0.01069834,0.012466802 1,0.010900356,0.012951546 2,0.011154411,0.012787689 3,0.011228244,0.012903754 4,0.0113491,0.012985683 5,0.0111311,0.01330657 6,0.011034197,0.013511391 7,0.010878735,0.012944719 8,0.01080543,0.013156368 9,0.010713386,0.013163195 10,0.010673823,0.013033475 11,0.010779542,0.013156368 12,0.011056048,0.013374844 13,0.010961683,0.013545528 14,0.011022628,0.013313397 15,0.011147232,0.013286088 16,0.011263758,0.014180475 17,0.011298661,0.014876868 18,0.011544032,0.012958373 19,0.011872388,0.012753552 20,0.012282807,0.013968826 21,0.012597305,0.014815422 22,0.012982473,0.015409404 23,0.013043123,0.014863213 24,0.013279724,0.014603773 25,0.01322401,0.014112201 26,0.01335002,0.014337505 27,0.013457253,0.015429886 28,0.013576248,0.014569636 29,0.013666633,0.014890523 30,0.014032533,0.015129481 31,0.014185185,0.014207785 32,0.014495409,0.015839529 33,0.014410962,0.014631082 34,0.014409988,0.014515017 35,0.014475479,0.014521844 36,0.014583943,0.013873243 37,0.014688688,0.0140371 38,0.014913523,0.013641112 39,0.014797501,0.012842308 40,0.015132378,0.014255576 41,0.01539819,0.013975654 42,0.015441512,0.015252374 43,0.015660189,0.014296541 44,0.015827338,0.013613802 45,0.015905817,0.013784487 46,0.01563851,0.013716213 47,0.015686114,0.014084892 48,0.015863668,0.013927862 49,0.015548306,0.014508189 50,0.01517499,0.015088517 51,0.015072413,0.014631082 52,0.014922953,0.014562809 53,0.014719617,0.015122654 54,0.014440493,0.014125856 55,0.014307121,0.014159993 56,0.014081774,0.014672047 57,0.013867217,0.013497737 58,0.01355741,0.013067612 59,0.01321794,0.01273307 60,0.013120304,0.012186879 61,0.012811712,0.011852337 62,0.012901203,0.011292492 63,0.012765048,0.010814575 64,0.012605913,0.011155944 65,0.012251486,0.011347111 66,0.011543426,0.010951123 67,0.009728389,0.008868771 68,0.010104137,0.007755907 69,0.009822711,0.007912937 70,0.00926218,0.007981211 71,0.00928413,0.007503294 72,0.009635664,0.006219746 73,0.009230454,0.005939823 74,0.008884033,0.005694038 75,0.008466476,0.005120537 76,0.008193726,0.005100055 77,0.007813615,0.005181984 78,0.007387631,0.004922543 79,0.006757906,0.00422615
,"Death rate per 100,000 individuals" 1990,5606.3 1991,5527.6 1992,5461.5 1993,5624.3 1994,5553.3 1995,5559.5 1996,5529.1 1997,5496.4 1998,5487.1 1999,5553.6 2000,5492.3 2001,5422.8 2002,5400.6 2003,5308.6 2004,5093.9 2005,5105.4 2006,4933.5 2007,4825.2 2008,4845.5 2009,4639.7 2010,4640.1 2011,4622.8 2012,4501.5 2013,4432.2 2014,4391.1
,Italy,Germany,United States 1950-1955,17.2,16.9,17.4 1955-1960,17.6,17.0,17.7 1960-1965,17.9,17.2,17.9 1965-1970,18.0,17.2,18.1 1970-1975,18.6,17.5,18.6 1975-1980,18.9,18.1,19.7 1980-1985,19.5,18.9,20.2 1985-1990,20.5,19.6,20.5 1990-1995,21.3,20.3,21.1 1995-2000,22.2,21.1,21.3 2000-2005,23.2,22.1,21.8 2005-2010,24.1,22.9,22.8 2010-2015,25.1,23.5,23.3
,Europe,United States 1950,0.12,0.13 1955,0.13,0.14 1960,0.14,0.15 1965,0.15,0.16 1970,0.16,0.16 1975,0.18,0.16 1980,0.19,0.17 1985,0.18,0.18 1990,0.19,0.19 1995,0.21,0.19 2000,0.22,0.19 2005,0.23,0.18 2010,0.24,0.19 2015,0.26,0.22 2020,0.30,0.26 2025,0.34,0.30 2030,0.37,0.34 2035,0.40,0.35 2040,0.43,0.36 2045,0.46,0.36 2050,0.48,0.37