number of older workers, this is likely to be offset by the favorable impact of the decline in inexperienced workers. Taking earnings as an indicator of productivity by age, population aging in the United States will have a negligible effect on average labor productivity in the coming decades. Nonetheless, there are many other potential impacts of a changing age distribution for which empirical evidence is lacking.

ADAPTING TO THE CHANGING DEMOGRAPHIC
AND ECONOMIC ENVIRONMENT

The Need for Action Despite the Uncertainty of Projections

This description of the consequences of population aging is based on forecasts of changes between now and 2050. Yet any forecast is subject to uncertainty, as described in detail in Chapter 3. The fact remains, however, that even after taking account of such uncertainty, the old age dependency ratio is virtually certain (97.5 percent probability) to rise by nearly 60 percent between now and 2050. Moreover, the committee stresses that the mere fact that projections are uncertain does not mean that the government should postpone responding to an anticipated fiscal imbalance.9 Individual taxpayers and beneficiaries are averse to uncertainty, in the sense that they want to avoid the possibility of a future loss even when balanced by the possibility of an equal future gain. In the same way, they would prefer to avoid the risk of larger future benefit cuts or tax increases even if there is an equal possibility that smaller benefit cuts and tax increases will be needed. For this reason, uncertainty means that action should be accelerated rather than delayed, to lessen the likelihood of very large benefit cuts or tax increases in the future. With uncertainty, it is desirable to have a lower debt-to-GDP ratio than we otherwise would, through additional public saving beyond what would be needed to respond to an expected fiscal imbalance. Of course, the desirability of doing this hinges critically on our ability to resist future political pressures to spend any budget surpluses that might accumulate.

At the beginning of the chapter, the committee discussed the four adaptive mechanisms that America might use to deal with an aging population: We can reduce the relative living standards of the elderly, work longer, increase saving while working, and/or transfer more from working ages to the elderly. Each of these mechanisms is discussed in more detail below.

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9The committee refers here to a “fiscal imbalance,” though by law benefits cannot exceed accumulated reserves plus current revenues. When it refers to an “imbalance” it means that, according to current projections, revenues plus reserves will be insufficient to pay the currently scheduled level of benefits.



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