The Aging Population in the United States and Its Effect on Our Economy

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Managerial Economics ORG 342

The Aging Population in the United States and its Effect on our Economy

July 20, 2010

Aging Population 1

The population in the United States is aging at an unprecedented pace. For the first time in history, seventy percent of everyone who has ever lived is alive today (Isidro, 2009). The aging population and their imminent retirement will place an even greater strain on the country’s financial resources. The baby boomers; people born between 1946 and 1964 have influenced our economy by their sheer number. As this age group matures and enters their retirement years, an economic shift is inevitable. Not only will changes be seen in government programs such as social security, Medicare, and Medicaid, but consumer spending will also see a dramatic transformation. Over the next thirty years, the United States will see the largest demographic change in history. 77 million baby boomers will cease to work and pay payroll taxes (Fehr, Jokisch, 2005). The drain on government social programs will be severe as the baby boomers retire and collect benefits. The gradual aging of the population will bring demographic changes not seen since the end of World War II. The increase in the number of people over age 65 strongly influences social, economical, medical, and personal situations. This phenomenon of aging will place extraordinary pressures on the economic resources necessary to sustain the population’s standard of living. In the Aging Population 2

United States, individuals over the age of 65 constituted 4 percent of the American population in the year 1900. In the year 1972, 10 percent of the population was over the age of 65. Estimates for the year 2050 are as high as 22 percent (U.S. Census Bureau, 2004). In the next 10 to 15 years, the first of the baby boomers will begin to retire. This will be a large generational shift from the young to the old. The United States population boom following World War II, did not continue with the resulting generation. This generation born as baby boomers produced much fewer children. This has resulted in the younger workforce shrinking as the aging population is increasing. The number of older persons supported by social security is growing while the number of younger employed persons paying into the retirement system is declining. This dependency ratio in the United States is currently at 20 percent. According to the World Bank, the dependency ratio will be close to 46 percent by the year 2050. The structure of the economy and consumption will experience a significant change. Many economists agree that people work and save money when they are young and live off the proceeds when they retire. With this formula, wealth peaks at retirement age and then declines thereafter indicating that people will have different consumption and saving patterns at different stages in their lives. With the change in the age structure, consumption patterns of the population will also Aging Population 3

change. The needs of older people are very different from the needs of middle aged and younger people and have less need for borrowing money (Isidro, 2009). Paying the elderly their promised benefits will require large tax increases. The burden on the younger workforce will be substantial. One study conducted by the National Bureau of Economic Research shows that the payroll tax will need to increase from 14 percent to 23 percent over the next 30 years, while the average income tax will rise from 10 to 14 percent. The total tax on wages will rise from 24 percent to 40 percent. Higher taxes mean lower after-tax income for workers. The younger work force will have less disposable income which results in less saving; less savings means less capital formation; less capital formation means lower labor productivity; and lower productivity means lower real wages (Fehr & Jokisch, 2005). The younger work force will experience a 25 percent...
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