process, we have created in this country a privileged, native-born elite of
skilled workers whose incomes are being supported at noncompetitively
high levels by immigration quotas on skilled professionals. Eliminating such
restrictions would, at the stroke of a pen, reduce much income inequality
and address the problem of a potentially noncompetitive capital stock.
The politics of immigration policy, of course, is influenced by far more
than economics. Immigration policy confronts the considerably more difficult
issue of the desire of the population to maintain the cultural roots that
tie the society together and foster voluntary exchange to mutual advantage.
The United States has always been able eventually to absorb waves of immigration
and maintain the individual rights and freedoms bestowed by
*The rise in the income spread between skilled and less-skilled workers worldwide suggests
that the shortage of skills is a global problem. Because international migration is so inhibited,
the "price" for skills does not converge globally. It is clearly more of a problem in the United
States than elsewhere. Hence, opening skilled immigration into the United States would put
upward pressure on wages of non-US. skilled workers and increase income concentration by a
modest amount; it would also lower the U.S. skilled wage level.
407
THE AGE OF TURBULENCE
our Founding Fathers. But the transitions were always more difficult than
hindsight makes them appear. If we are to continue to engage the world
and improve our standard of living, we will have to either markedly improve
our elementary and secondary education or lower our barriers to
skilled immigrants. In fact, implementing both measures would confer important
economic benefits.
Public policy is a series of choices. We can build exclusionary walls
around the United States to keep out the goods, services, and people that
compete with domestic producers and workers. The result would be a loss
of competitive spark, leading to a stagnant and weakened economy. Our
standard of living would fall and societal discontent would fester and rise,
as the once-vaunted superpower fell from its position of world leadership.
Alternatively, we can engage the increasingly competitive high-tech
world, address our domestic school system's failure to supply a level of
newly skilled workers sufficient to quell our disturbing increase in income
inequality, and further open our borders to the world's growing skilled-
worker pool.
No alternative offers a rising American standard of living without the
challenge and stress of borders open to goods and people. Choice is what
public policy is all about. And with choice come both benefits and costs. To
achieve the benefits, we need to accept the costs.
408
TWENTY-TWO
THE WORLD RETIRES.
BUT CAN IT AFFORD TO?
A
A
lmost all of the developed world is at the edge of a demographic
abyss for which there is no precedent: a huge cohort of workers,
the baby-boom generation, is about to move from productive
work to retirement. There are too few younger workers to replace them,
and the shortfall among skilled workers is even worse. The leading edge of
change is particularly evident in Germany, where, despite high unemploy
ment, severe shortages of skilled workers are mounting. A German job re
cruitment executive told the Financial Times (November 28, 2006): "The
battle for workers has already begun, and given the demographic trends in
Germany and in parts of southern and eastern Europe, it is about to get a
lot worse."
This tectonic shift is truly a twenty-first-century problem. Retirement
is a relatively new phenomenon in human history; average life expectancy
a century ago for much of the developed world was only forty-six years.
Relatively few people survived long enough to experience retirement.
The ratio of the dependent elderly to the working-age population has
been rising in the industrialized world for at least 150 years. The pace of
increase slowed markedly with the birth of the baby-boom generation after
THE AGE OF TURBULENCE
World War II. But dependency of the elderly will almost certainly rise more
rapidly as that generation reaches retirement age. The acceleration will be
particularly dramatic in Japan and Europe. In Japan, the population share
of those at least sixty-five years of age climbed from 13 to 21 percent in the
past decade, and United Nations demographers expect it to reach 31 percent
by 2030. The Japanese working-age population is already declining
and is projected to fall from eighty-four million in 2007 to sixty-nine million
by 2030. Europe's working-age population is also anticipated to recede,
though less than Japan's.
The changes projected for the United States are not as severe, but
nonetheless present daunting challenges. Over the next quarter century,
the annual growth rate of the working-age population in the United States
is anticipated to slow, from 1 percent today to about 0.3 percent by 2030.
At the same time, the percentage of the population that is over sixty-five
will rise markedly. Though the overall population is expected to continue
to age, much of the aging of the labor force has already occurred with the
aging of the baby-boom generation. Once the baby boomers begin to retire,
the mean age of the U.S. labor force is expected to stabilize.
These anticipated changes in the age structure of our population and
workforce result largely from the decline in fertility that followed the postwar
birth surge. After peaking in 1957 at 3.7 births over a woman's lifetime,
the fertility rate in the United States fell to 1.8 by the mid-1970s;
since 1990 it has stabilized at slightly less than 2.1, the so-called replacement
rate, or the level required to hold the population constant in the absence
of immigration or changes in longevity.* The decrease in the number
of children per family since the baby boom has inevitably led to a projected
increase in the ratio of elderly to those of working age.
Continued immigration, however, will mitigate the impact of a falling
birth rate, and population growth will be sustained as well by increases in
life expectancy. In 1950, an American man sixty-five years of age could
expect, on average, to live until age seventy-eight, whereas now he can ex
*The fertility rate used here is the total fertility rate. It is measured as the average number of
children who would be born to a woman in her lifetime if she were to experience the birth
rates by age observed in any given year.
410
THE WORLD RETIRES. BUT CAN IT AFFORD TO?
pect to live to eighty-two. And if current trends continue, by 2030 he can
expect to live to eighty-three. Women's life expectancy is rising similarly
from eighty in 1950 to roughly eighty-four today and eighty-five by 2030,
according to the Social Security Board of Trustees in 2007.*
Americans not only are living longer, but we are also generally living
healthier. Rates of disability for the elderly have been declining, reflecting
improvements in all phases of medicine, as well as the changing character
of work. It is becoming less physically strenuous and more demanding intellectually,
continuing a century-long trend toward a more conceptual and
less physical economic output. In 1900, for example, only one out of every
ten workers was in a professional, technical, or managerial occupation. By
1970, that proportion had doubled, and today those types of jobs account
for about one-third of our workforce. An inevitable consequence,
then, of the aging of America will be that more of our elderly population
will have both the ability and the incentive to work later and later into
old age.
Workers in their sixties have accumulated many years of valuable experience,
so extending labor force participation by just a few years could
have a sizable impact on economic output. But there is no getting around
it: almost all of the baby-boom generation will have retired by 2030. And
their retirement will be unmatched in length by any previous generation.
Will those "golden years" be truly golden? How will the more slowly growing
U.S. workforce that will follow the baby boomers produce goods and
services for themselves and their families as well as for a retired population
whose size is without precedent?
The hard facts of demography will have a profoundly wrenching effect
on the balance of world economic power. Aging is not an immediate issue
for less-developed nations, with the exception of China, which has suppressed
its birth rate through central planning—the government's one-child
policy. The United Nations projects that the share of world population residing
in what are today's developed nations will fall to 15.2 percent by
2030 from 18.3 percent today. How developed nations cope in the face of
*The trustees for Social Security and Medicare include the secretaries of the treasury and labor
and two public trustees appointed by the president.
411
THE AGE OF TURBULENCE
such a shift may go a long way toward either assuaging or intensifying
changes in the world's economic balance of power. Critical to the outcome
is whether developed nations, confronted with loss of power and prestige,
become inward looking and erect barriers to trade with a burgeoning developing
world. How governments finesse the transfer of real resources from
the shrinking shares of their populations who make up their productive
workforce to a growing retirement population is likely to be a defining
question of the next quarter century. For democratic societies, the politics
will be particularly daunting, as an increasing share of the electorate will be
benefit-recipient retirees.
The economics of retirement is straightforward: enough resources must
be set aside over a lifetime of work to fund consumption during retirement.
The bottom line in the success of all retirement systems is the availability
of real resources at retirement. The financial arrangements associated with
retirement facilitate the diversion of resources that make possible the consumption
of goods and services after retirement, but they do not produce
those goods and services. In the United States, Congress may pass, and the
president may sign, legislation that, for example, provides an entitlement,
upon retirement, to a specified level of health care. But who assures that
the hospitals, pharmaceutical companies, physicians, nurses, and medical
infrastructure generally will be in place to convert a paper promise into
valuable future medical services?
A simple test for any retirement system is whether it can assure the
availability of promised real resources to retirees without overly burdening
the working-age population. By that measure, America may be on a collision
course with reality. The oldest baby boomers become eligible for Social
Security in 2008. By 2030, according to UN projections, people
sixty-five years of age and older will account for more than 23 percent of
the adult population, compared with 16 percent today. This huge population
shift will expose all our financial retirement systems to severe stress
and will require adjustments for which there are no historical precedents.
The fact that a greater share of the dependents will be elderly rather than
children will put an additional burden on society's resources, as the elderly,
per capita, consume a relatively large share of resources, while children
consume relatively little.
412
THE WORLD RETIRES. BUT CAN IT AFFORD TO?
After receding for years, labor force participation among older Americans
has edged somewhat higher recently owing to rising pressures on retirement
incomes and a growing scarcity of experienced labor.* As I noted
earlier, it will no doubt continue to rise. Nonetheless, the most effective
way to boost future standards of living, and thereby accommodate the
aspirations of both workers and retirees, is to increase the nation's saving
and the productiveness of its uses.1" We need significant additional saving
in the decades ahead if we are to finance the construction of capital facilities—
for example, cutting-edge high-tech plant and equipment—that will
produce the additional real resources to ensure that the promised retirement
benefits for the baby boomers will be redeemable in real terms. And
we need to do this without having to severely raise burdens on tomorrow's
workers.
However, by almost any measure, the additional saving required to take
care of the surge in retirees is sufficiently large to raise serious questions
about whether the federal government will be able to meet the retirement
commitments already made.
The trustees of the Social Security system calculate that it would take
either an immediate increase in the payroll tax from its current 12.4 percent
to 14.4 percent, an immediate across-the-board cut in benefits of 13
percent, or some combination of the two to close the funding shortfall over
the next seventy-five years. Postponing or phasing in the adjustments would
require higher taxes or lower benefits later. And because of the large deficits
projected beyond the seventy-five-year horizon, "seventy-five-year solvency,"
the somewhat arbitrary standard for social insurance, will require
further adjustments later. While the projected shortfall is problematic, it
doesn't, by itself, create insurmountable fiscal or economic difficulties. Most
important, projections of Social Security benefits are relatively reliable.
This is because the demographics of the retiree population are among
*Despite the growing feasibility of work at older ages, Americans have been retiring younger
and younger. In 1940, for example, the median age of retirement for men was sixty-nine; by
2005, the median age was about sixty-two.
tAdditionally, we could borrow from abroad, which should build up the U.S. physical capital
