How can societies prepare for an aging population?
Actions now can help turn the tide and mitigate the economic impacts of population aging
The population in the United States is aging due to reductions in mortality and fertility rates. This impacts the economy by increasing the share of the population eligible for public benefits relative to the share of the population working and financing those benefits. Policymakers can, however, address these long-term challenges by investing in the health of the population, restructuring public programs to be sustainable and resilient, and improving the productive capacity of the labor force.
The U.S. population is expected to age substantially over the next few decades
Economic outcomes and public spending are heavily influenced by the size and age structure of the population, which is shaped by birth rates, death rates, and net migration. Projecting how these factors will evolve requires an understanding of the different forces impacting fertility, mortality, and immigration and how they are expected to influence family formation, health and mortality, and a country’s inflows and outflows.
U.S. population projections are available from a variety of different sources, including the Congressional Budget Office (CBO), the Social Security Administration, and the U.S. Census Bureau. While these projections are inherently uncertain, a consistent theme in any projection of the U.S. population is that the population is aging. According to the CBO, the share of the population 65 and older is projected to increase from 17 percent in 2023 to 22 percent in 2050, and the change is even more dramatic for the share of the population 85 and older, which is estimated to reach 4.5 percent by 2050 from 1.8 percent today (see Figure 1).
Figure 1: The share of the U.S. population age 65+ and 85+ is projected to increase substantially in the coming decades
The projected aging of the population is driven by assumed reductions in mortality and fertility rates relative to prior decades. The number of deaths per 100,000 people was almost 1,500 in 1950 and declined to almost half by 2019 (765 deaths per 100,000 people) after adjusting for changes in the age and sex composition of the population, though increases in deaths from suicide and overdose slowed this progress in recent years. While the COVID-19 pandemic resulted in elevated mortality rates in 2020 and 2021, mortality rates are expected to continue their downward trend, declining to 588 per 100,000 by 2050 (see Figure 2).
Figure 2: Recent and projected mortality, fertility and immigration rates are responsible for population aging
The total fertility rate, which represents the number of births per woman, was 2.1 in the mid-2000s prior to the Great Recession, but fell to 1.7 in 2019, prior to the COVID-19 pandemic (see Figure 2). The CBO predicts that the total fertility rate will increase to 1.75 by 2030 and stay at this level into the future. It is worth noting that a fertility rate of 2.1 births per woman is considered to be the replacement rate – that is, the level of fertility at which a population exactly replaces itself from one generation to the next. The reductions in fertility are so consequential that new births are projected to be less than deaths by 2042 (despite the accompanying assumed reductions in mortality), meaning that U.S. population growth will eventually be driven by immigration alone.
Assumptions regarding migration influence not only population growth but also are also important in projecting the age structure of the population since immigrants tend to skew younger. The CBO projects net immigration to roughly equal the average rate from 2000-2023 over the next 30 years (see Figure 2). While all projections are inherently uncertain, future immigration rates are particularly difficult to forecast due to the large influence of immigration policy.
The aging of the population presents several economic challenges
Several social insurance programs are designed to help cushion the economic losses that people face when they are ill and/or unable to work and are financed primarily by contributions by the working-age population. For example, Social Security collects payroll taxes from workers and pays benefits to retired and disabled beneficiaries; Medicare is financed by a combination of payroll taxes, premiums, and general revenues (raised by the tax system, primarily on those who work).
The design of U.S. social insurance programs no longer reflects the demographic makeup of the population. Fundamentally, the aging of the population serves to increase the number of beneficiaries relative to the number of people making contributions to programs like Social Security and Medicare. Because the required contribution rate, eligibility criteria, and the formula dictating the level of benefits are governed by law, structural changes in economic and demographic factors – such as aging – will lead to imbalances that can grow over time.
Demand for long-term care services is expected to increase rapidly as the population ages. The disjointed system of long-term care financing mirrors the healthcare system at large, but involves a larger proportion of costs borne by households in the form of out-of-pocket spending and informal caregiving, and represents one of the largest expenditure risks facing the elderly population. Many people initially pay for long-term care services using their personal savings or rely on informal caregivers, but if their needs become more severe and/or their resources are exhausted, they may qualify for Medicaid, which is the largest payer for long-term care services in the United States.1 Medicaid expenditures for long-term care are expected to grow substantially as the population ages. Reliance on family caregivers imposes substantial opportunity costs on caregivers and results in poorer physical and mental health for the caregivers themselves.
Even if resources to pay for the needs of the aging population are allotted, the infrastructure to meet the needs of the aging population will likely become strained. In particular, the long-term care workforce will need to grow substantially to keep pace with growing demand. However, employment in elderly care and skilled nursing facilities has struggled to recover since the start of the pandemic despite wage growth.
Finally, population aging can impact the economy and its growth through its influence on the size of the labor force, productivity, and interest rates. The size of the labor force is an important input into the economy, and projections of the number of workers reflect the fact that older adults are less likely to participate in the labor force. One study estimates that a 10 percent increase in the share of the population age 60 and over results in a reduction in GDP per capita by 5.5 percent, where two-thirds of this reduction comes from a reduction in labor productivity and one-third is due to a reduction in growth in employment per capita.2 The authors conclude that population aging between 1980 and 2010 already reduced the growth in GDP per capita by 0.3 percentage points per year over this period and that the losses over the 2010-2030 period will be larger as aging accelerates. Another study finds that ongoing demographic change will depress global interest rates by approximately 100 basis points by 2100 relative to a scenario where the age structure of the population remains unchanged, which is predicted to have heterogeneous effects across countries.
Policymakers can ease the burden of these challenges on future generations by taking action earlier rather than later
The writing has been on the wall that the population is aging, but that does not mean actions cannot be taken now to prepare for and mitigate the impacts. First, policy options should be evaluated based on how well they address risk and uncertainty. Second, long-term investments in health at young ages can pay off in the long run in reduced dependency later in life. Third, actions can be taken to increase the productive capacity of the labor force. Finally, stronger long-term care systems are needed to both protect elderly households from large financial risks and address the growing share of government budgets devoted to long-term care.
How do we make social insurance programs not only solvent but more resilient?
Entitlement reform proposals generally focus on balancing expected budgets. However, an equally important aspect of reform solutions is to consider what happens if or when budgets do not play out as expected due to uncertainty in demographic or economic assumptions.
Take Social Security as one example. Several policy solutions exist to reduce the actuarial deficit that results from expected costs being larger than expected revenues, and each includes some combination of benefit reductions and tax increases to close the gap. These plans, however, only work out as long as assumptions play out as expected. Who bears the risk when factors such as mortality, fertility, inflation, and growth evolve differently from what is assumed? For instance, if any shortfall in Social Security trust funds is to be covered by general revenues, current and future taxpayers bear the risk; alternatively, if benefits are reduced in the event of trust funds running short, beneficiaries bear the risk.
Population aging doesn’t have to be accompanied by more dependency
Broadly speaking, the finances of social insurance programs can improve if the needs of beneficiaries decline or the population contributing expands. Just because there are more people over the age of 65 does not mean that 65 will mean the same thing 50 years from now as it does today.3
Investments in health throughout the life course can serve to improve health later in life and reduce the needs of social insurance program beneficiaries. For example, the introduction of Medicaid led to vast expansions in insurance coverage, and early childhood Medicaid eligibility has been shown to reduce in mortality and disability, increase employment, and reduce the receipt of disability transfer programs up to 50 years later. The magnitude of these effects is so large that Medicaid has saved the government more than its original cost through these channels while also saving more than 10 million quality-adjusted life years.4 More recent expansions in Medicaid coverage among children have been shown to reduce hospitalizations and emergency department visits among Blacks in early adulthood and improve health in later years. Recent proposals to reform the American health insurance system can deliver these benefits through automatic, basic, and free universal coverage for everyone within the budget of the current healthcare system.
How can we increase the productive capacity of an aging workforce?
First, investments in health described earlier have been shown to increase educational outcomes and later-life earnings. Medicaid expansions among children led to higher reading test scores and higher rates of high school and college completion. Furthermore, increases in Medicaid eligibility during childhood translated to increased wage income and tax revenue throughout adulthood.
Second, specific attention should be focused on ways to ensure that older workers who wish to remain in the workforce are supported and that distortions they face are minimized. For example, results from the American Working Conditions Survey showed that nearly half (46 percent) of those 50 and older who were not working say that they would consider returning to the workforce if conditions were right, and that older workers value workplace flexibility and having some control over how they do their work, the ability to set their own pace, and the physical demands of the job.
In addition to aligning the non-monetary aspects of work between employers and older workers, there are several ways in which policymakers can improve the returns to working for older workers by removing the implicit taxes that result from the way that benefits from programs like Social Security and Medicare accrue. For example, policies that alter the secondary status of Medicare for workers eligible for employer-sponsored health insurance or that implement a “paid up” status for Social Security and Medicare payroll taxes could make work at older ages more financially rewarding.5 Finally, loosening immigration restrictions is likely to slow down the aging of the population directly and expand the population paying into entitlement programs, since the age profile of immigrants tends to be younger.
Long-term care systems need a reboot
Finally, policy solutions that address long-term care financing face the challenging task of addressing both the financial and caregiving-associated risks that households face while also ensuring that public expenditures for long-term care are sustainable. Research has shown ways in which both the demand and supply side of the market for private long-term care insurance is hampered, and suggests that without reforms that address these factors, current trends are likely to continue. From a risk management standpoint, it is important not only to consider how costs are shared across public and private payers, but also to understand who bears the risk of economy-wide increases in long-term care costs.
Conclusion
Like the proverbial frog in a slowly boiling pot of water, the detrimental effects of population aging will accumulate gradually and almost imperceptibly. Waiting too long to address these challenges can result in disruptive changes that are more difficult to manage. Taking action earlier will allow governments, businesses, and individuals to adapt and implement necessary adjustments and are essential to mitigating long-term economic impacts – and could even make the aging of the population good for the economy as a whole.
The author would like to thank Emma Casey, Shreya Joshi, and Priyanka Parikh for outstanding research assistance, and Adrien Auclert for helpful comments.
Medicare, the federal health insurance program for seniors 65 and older only covers short-term rehabilitative care in skilled nursing facilities and some home health care services but does not provide comprehensive coverage for assistance with activities of daily living resulting from chronic and disabling conditions.
Consider two scenarios. In the first, reductions in mortality are by definition costly from a social insurance perspective because the increases in length of life are assumed to be years of poor health and high healthcare spending. However, in the second, improvements in life expectancy instead extend the period of life when people are working and paying taxes. The difference between these two scenarios is dramatic: the costs of Medicare and Medicaid would be 3 percentage points lower than projected by 2070 if spending is modeled as a function of remaining life expectancy instead of years since birth, and labor supply is projected to be 9.6 percent higher under that scenario.
Quality-adjusted life years take into account not only extensions in life but also the quality of life of additional years of life saved, where one quality-adjusted life year equals a year saved in perfect health.
These policies both have the effect of worsening the financial status of the programs but could be offset by slightly higher payroll taxes.