by Adam Ozimek
The U.S. population is aging faster than ever. One hundred years ago, one out of every 20 Americans were senior citizens; by fifty years ago, this share had doubled. New U.S. Census projections estimate this share will soon double once again to one out of every five Americans.
There is a growing chorus arguing that this aging of the population will be good for workers. With fewer people in the labor market, the argument goes, a scarcity of workers will translate to strong wage growth. There is some truth to the idea that if you could wave a magic wand and push a substantial percentage of workers into retirement—all while affecting no aspects of the economy besides labor market bargaining power—this would indeed result in higher wages for the remaining workers. Alas, there is no magic wand that leaves the rest of the economy untouched.
Instead, aging affects the economy like it affects the body. As we age, the negative impacts show up in our bones, muscles, and organs, particularly the brain. The wide variety of issues don’t just accumulate, but interact and exacerbate one another. Dementia and weaker bones in combination, for example, heighten the risk of a serious or even deadly fall. The challenge of an aging economy should be viewed as a similar phenomenon: a myriad of interrelated challenges that lead to a broad deterioration of health, be it of the body or the economy.
High among these challenges is a greater fiscal burden at the state, local, and federal levels. An aging population corresponds with a decline in work and spending, and thus both lower income and sales tax revenues. There will be larger federal expenditures for Social Security and Medicare, as well as greater healthcare and pension costs for retired government employees at the state and local levels. Squeezing more spending from a smaller tax base means higher tax rates or offsetting cuts to government services, both of which hurt workers and their families.
An older population doesn’t just mean a smaller labor force but also a grayer one, as a result of a growing pool of older but not-yet-retired workers. Just under 7 percent of the current U.S. labor force is age 65 or over, more than double the rate from two decades ago and substantially higher than at any point in U.S. history going back to the 1850 Census. An older workforce can slow technological adoption at the firm level, and evidence suggests this impact is great enough to reduce wages for all workers. Businesses and workers must incur training costs to learn to use new technologies and new processes. Those costs are harder to recoup as workers near retirement age and further clog the gears of economic productivity.
Further, an aging population doesn’t arrive by itself as the hypothetical magic wand assumes, but tends to be accompanied by lower population growth. The 10 percent of counties with the oldest population had a decline of 1 percent of their overall population over the last decade; in contrast, the counties with the youngest 10 percent saw average population growth of 11 percent. This change is partly because an aging population and lower population growth are driven by some of the same upstream factors: namely falling birthrates and unfavorable migration patterns. Indeed, slower population growth is assumed in the optimistic theory about an aging population, where a shrinking labor force is precisely how workers end up benefiting. Thus, even in the optimistic story, we must account for the wider negative impacts of a shrinking labor force.
Finally, a shrinking labor force means fewer startups, which are major sources of innovation and productivity growth that provide prosperity for all. Fast-growing startups are more likely to put workers and capital to their highest and best use compared to older, comfortable, incumbent firms. When economic shocks hit an area -for example a large firm closing under pressure from global competition- it is startups and entrepreneurs who help to steer the local economy towards new ways of creating value and new jobs. Unlike the theorized relationship between aging and tight labor markets, there is a strong body of evidence establishing that demographic decline has dampened startup rates in the U.S., leaving workers worse off by reducing competition and shrinking their share of the economic pie.
The costs of an aging population are not just hypothetical. Far beyond the radar of most media outlets and D.C. policymakers, demographic decline is causing serious problems in large swaths of the country. Contrary to what the optimists would have you expect, these aren’t places where tight labor markets are generating rapid wage growth. They lack sufficient employers, especially new and innovative ones; they are places where school districts can’t afford art and music programs; and municipalities can no longer maintain basic services. These places are also a glimpse into the future for the rest of the U.S.
There is much we can do to mitigate these problems, such as policies to encourage family formation as well as place-based immigration, especially for the places already dealing with demographic decline. But before we even debate those policies, we first need broader recognition of the scale of the problem. Claims that an aging workforce and slowing population growth will benefit workers is misplaced and counterproductive.