The New Old World: Achieving Its Potential
On behalf of the Wilson Center and the Center’s Project on America and the Global Economy, Project Director Kent H. Hughes welcomed more than 130 participants to a breakfast session cosponsored by the Woodrow Wilson International Center for Scholars and AARP. For participants new to the Wilson Center, Hughes noted the Center’s 1968 creation as a living memorial to the nation’s 28th President, Woodrow Wilson. Like Woodrow Wilson himself, the Center strives to blend the world of scholarship and the world of policy, the realm of ideas and the arena of action. Hughes then introduced the co-hosts of the morning event, Lee H. Hamilton and William D. Novelli.
Lee Hamilton, President and Director of the Wilson Center, expressed his pleasure at joining with AARP to focus on the challenges and opportunities posed by aging in the major industrial countries. After noting the fiscal, workforce, and other challenges, Hamilton went on to emphasize the opportunities that lie ahead as society learns to harness the knowledge and experience of older workers.
William D. Novelli, Executive Director and CEO of AARP, spoke for an organization representing thirty-five million Americans over the age of fifty – half of them still in the workforce. As CEO, Novelli has sought to make AARP a leading voice on global aging. Novelli spoke of a “longevity bonus” as “one of the great success stories of the 20th century that he credited to the eradication of childhood diseases and improvements in public health, diet, and standards of living.” While noting the need to address the “sustainability of pension and health care systems with more older people and fewer workers to support” them, Novelli also stressed the opportunity for employers and governments to capitalize on the talent pool represented by older workers.
Nancy LeaMond, Director of International Affairs at AARP, introduced the two keynote speakers. Martha Farnsworth Riche, former Director of the U.S. Census Bureau who now consults through Farnsworth Riche Associates made the first presentation and was followed by David M. Walker, the seventh Comptroller General of the United States who directs the General Accounting Office, the investigative arm of the U.S. Congress. LeaMond then introduced John Parker, Washington Bureau Chief of The Economist.
Martha Farnsworth Riche highlighted the demographic shift in the United States by contrasting a 1970 pyramid with more young and fewer older people to a pillar showing the projected U.S. population in 2020. There are still more children born each year in the United States than in the preceding year. The shift from pyramid to pillar showed that the number of children declined as a proportion of the overall population. What differed were the birth rates and the pace of immigration.
She noted that aging was a common phenomenon in all the G7 countries. At one extreme stood the United States. Its birth rate was just high enough to reach a replacement rate (requiring 2.1 percent live births per female). Population growth occurred because of high rates of immigration combined with greater longevity. At the other extreme stood Japan, Italy and some other Mediterranean countries where birth rates have dropped sharply, reaching between 1.1% in Italy, Japan, and Spain. There was relatively little immigration to offset the low birthrate. Somewhat higher birthrates in the United Kingdom and Scandinavia placed them in between the two extremes.
While aging in Canada, Europe, Japan and the United States poses a number of problems, Riche returned to the question of opportunities. She refused to cast the triumph of medicine, improved nutrition, and effective public health as anything but a success. In terms of the United States, while the population was aging, the shift away from heavy physical work and an increase in the educational attainment of the workforce suggested greater opportunity for new skills, new careers, and a more flexible future.
David Walker also looked at aging from the perspectives of challenges and opportunities. He did not downplay the fiscal challenge. Compared to the G7 countries (the major industrial democracies), the United States has higher rates of birth and immigration. As a result, the elderly dependency ratio (the number of elderly compared to working age population) will increase faster in other high-income countries. Still, labor force growth in the United States will continue to decline from a bit over 1% in 2003 to barely two-tenths of one percent by 2050. The fiscal challenge is particularly stark. By 2013 the Medicare Health Insurance faces a cash deficit; for social security the turning point comes in 2018. By 2030, the combined deficits approach the $500 billion a year mark and continue to grow.
To focus on the potential dimensions of the long-term fiscal challenge, Walker cited a recent GAO projection. Assuming that domestic discretionary spending grows at the same pace as the economy and that the 2001 tax cuts become permanent, federal spending grows from just under 20% of the economy in the year 2000 to more than 40% by the year 2040. Under this scenario, deficits will continue to grow and the cost of interest payments on the resulting government debt also rises sharply. As with any projection, the underlying assumptions are critical to the result. Policy choices could slow domestic spending, reduce or even reverse the 2001 tax cuts, extend the retirement age, or otherwise alter Social Security and Medicare.
Walker also talked about the opportunities as well as the challenges. He set aside the phrase older worker and replaced it with “seasoned” worker, emphasizing the value of skills that have been honed with experience and tempered by judgment. In looking at ways to increase the labor force participation of ‘seasoned’ workers, Walker reported on a GAO study that explored policy initiatives in Japan, Sweden, and the United Kingdom. All three countries had adjusted their pension systems to help keep seasoned workers in the labor force. These three countries also sought to reduce barriers to continued employment for the seasoned employee, namely by increasing mandatory retirement ages, working to eliminate age discrimination, and improved training. In some regards, the U.S. is ahead of the G7 in eliminating barriers and creating incentives for continued seasoned worker participation in the work force. But the United States along with the other G7 countries will need to continue to review these incentives and remove remaining and often pervasive barriers to seasoned worker employment.
In his commentary, John Parker, Washington Bureau Chief of The Economist, suggested how markedly different demographic trends are driving the United States and Europe in different directions. At 300 million people, 1950 Europe was about twice the size of the United States. Even, today, Europe’s population is about 100 million larger than that of the United States. According to mid-range projections of the U.S. Census Bureau, however, the U.S. population will pass Europe’s by 2040.
To draw an even greater contrast, Parker noted that the high-range forecast would put the 2050 U.S. population at 550 compared to a European figure of 360 million that would be expected to decline. There could also be a growing gap on the economic side. U.S. per-capita income is about one-third higher that its European counterpart. Assuming that gap remains, the 2050 U.S. economy will be almost twice as large as its European counterpart.
Parker did see some European parallels with the late 20th century American experience. In 1960, the U.S. fertility rate was well over two, but as American women delayed having children the birth rate fell to 1.8. As that cohort of American women started to have babies, the birth rate has rebounded to an approximate rate of about 2.1%, just enough to replace the population. To some extent, Parker thought that Europe was going through a similar stage of delaying children. He also noted some differences. The average European fertility rate has fallen to about 1.5% and in some Mediterranean countries is has slipped as low as 1.1 and 1.3%. The U.S. birth rate never fell as far as it has in several European countries nor did he expect to see the European birthrate rebound as much as it has in the United States.
Earlier speakers have focused on the elderly dependency ratio, that is the number of older people compared to the number of working age individuals. Parker also talked about the overall dependency ratio that compares the number of elderly persons and children to the size of the working age population. Thus, while the U.S. labor force will continue to grow, because the higher birth rate will add more children, the overall dependency ratio will remain roughly the same.
The demographic trends suggested by Parker would also leave the United States with a significantly younger work force than in Europe. In 2050, the average American will be 36 while in Europe the average age will have risen to almost 53 years. In the past, younger workforces have led to lower labor costs – an added American advantage.
QUESTIONS AND ANSWERS:
Q: The Fiscal Challenge: There were a number of questions about how to deal with the fiscal challenges posed by future retirees. One participant suggested switching from a payroll or wage tax to an income tax. Another noted the impact of rising interest costs. A third wondered how the continued participation of seasoned workers in the labor force would change the long-term fiscal outlook? Still others questioned the underlying assumptions of the GAO projections.
A: Payroll to Income Tax: Shifting to an income rather than a payroll tax would probably shift the burden of higher taxes from lower to higher income groups but would still draw added resources from the overall economy. In addition, increasing the tax burden on today’s taxpayers raised a question of intergenerational equity. Assuming productivity growth continues, how much burden should there be on today’s workers rather then on the more productive and hence more highly paid workers in the future? In any case, the panel thought the shift would be politically difficult.
Q: Rising Interest Costs
A: The question referred to the GAO projections which showed a sharp increase in Social Security payments and the cost of other entitlements between 2000 and 2030. Between 2030 and 2050, because of the explosion of the government deficits and the resulting rise in government debt, interest payments rise sharply.
Q: Seasoned Workers Stay in Workforce
A: Continued workforce participation by seasoned workers could have a substantial impact on the long-term fiscal needs of the retirement programs. It would, however, depend on what kinds of changes were made in retirement programs. For instance, some countries had raised the retirement age while others allowed partial access to retirement benefits for those still in the workforce.
Q: Assumptions and Projections
A: In general the panel agreed that a shift in demographics or major changes in policy could change long-term projections. David Walker stressed that the GAO projections were based on the Congressional Budget Office’s assumptions for long-term economic growth and government estimates of social security and health care costs. GAO also assumed that the 2001 tax cuts would be made permanent. If the economy grew more rapidly, the fiscal gap would be smaller. If the 2001 tax cuts were allowed to sunset, the gap would be smaller. But, it was very unlikely that these potential solutions, either alone or in combination, would eliminate the gap. The country would still be faced with difficult policy choices.
Q: The Challenge for Developing Countries - With large numbers of young people, developing countries also face a high dependency ratio. Yet, if fertility rates continue to fall, they will face a demographic challenge similar to the one faced by today’s industrial democracies.
A: The panel shared a concern about the current and future challenges facing the developing world. If the G7 countries continue to use a large portion of tax revenues for retirement related programs, there will be less available to spend on the developing countries.
Q: Is a larger population a good thing?
A: The panel agreed that a larger population brought its own set of problems – urban sprawl, pressure on the education system, and a rising demand for many other social services. They also noted that there is no nationally shared goal about whether the population should grow or not. Instead, they had focused their analysis on the implications of slower or faster population growth.
Q: Isn’t the key rising per-capital income not GDP?
A: In terms of per-capita income, one of the panelists cited the vision of a senior Japanese politician who emphasized the importance of turning to technology to raise productivity and thus incomes even when the population itself may be in decline.
Q Productivity Growth Requires Change: Will Seasoned Workers Accept it?
The participant suggested that productivity growth would require agility. If the population is declining, progress and thus productivity growth will be measured by how many jobs are eliminated not created. Will, the participant asked, seasoned workers accept that kind of change or will they use their voting power to maintain older industries and the existing economic base?
A: The panel generally remained optimistic about the potential of drawing on the skills of seasoned workers and the potential for technological advancement.