lation will age substantially in the next few decades. Health at older ages has also improved over the last half century as disability rates have fallen, and many of the additional years that people are living are healthy ones. However, the decline in disability appears to have stopped around 2000, and the future trend is uncertain. Nonetheless, the committee finds there is substantial potential for increased labor force participation at older ages if people so choose. While the baby boom generation, whose oldest members are now at retirement age, has made the phenomenon of population aging more noticeable, the coming demographic transition is not just about the baby boom cohort. It is, fundamentally, about longer-run factors. Population aging is a broad, more pervasive trend that is here to stay.
There is already a very broad consensus that population aging will place fiscal pressure on the major government programs that help support older persons in this country. Social Security, Medicare, and Medicaid are on unsustainable paths, and failure to remedy this situation raises a number of economic risks. Health care costs per eligible person have been growing substantially faster than per capita income for decades, and if this pattern continues, it will interact with population aging to drive up public health care expenditures strongly. Recent reforms attempting to address this problem could lead to fundamental change in the delivery, quality, and cost of care, but their impacts are as yet unclear.
Leaving aside the effects of population aging on government transfer programs, there are also important effects of aging on the nation’s economy. If people continue to retire as they do now, population aging means that there will be proportionately fewer people working to support more and more people who are not working. This means that a larger fraction of national output will be diverted to expenditures by the nonworking older population. This diversion will be even larger because there has been a large increase in consumption per older person relative to younger adults, owing in part to rapidly rising public and private expenditures on health care for the elderly. Changes in the age of retirement have been mixed. Although people are living longer and are in better health at older ages, the average retirement age declined by many years during the twentieth century. However, this downward trend stopped and reversed around 1995, and since then the average retirement age has risen about a year and a half, an important trend. All else equal, this diversion of output to the elderly will make it more difficult to raise living standards.
There are four basic approaches for adapting to the new economic landscape created by an aging population, and for providing the resources to support the consumption of households in their later years: