Economic Perspectives on Aging: An Overview

The aging of the US population, over the decades ahead, will affect our society and economy and be one of the primary domestic public policy issues. The US Census Bureau projects the fraction of the elderly in the total population to increase from its 2002 level of 12.5 per cent to 16.3 percent by 2020. Concomitantly, the fraction of working age population (20–64) is projected to decline from its current level of 59 to 57.2 percent in 2020. Alternatively, as Kotlikoff and Burns (2005) prefer to put it, in 2030 there will be as many as 77 million baby-boomers hobbling into old age — twice as many retirees as there are currently — but only 18 percent more of potential workers. What this means is that the ratio of the number of people eligible to retire to the entire population and to the projected workforce would both be higher (Bernanke, 2007). These trends are in sharp contrast to those observed during 1970–2002 when the proportion of the working age population in the US actually grew by about 5 percentage points. These demographic changes certainly imply a significant growth in the federal entitlement programs. Apart from the growth in the number of beneficiaries, existing benefit rules and rapidly escalating health care costs are expected to lead to fiscal pressures on the federal budget and pose challenges for economic growth. Federal expenditures for Social Security, Medicare, and Medicaid (via payments for long-term care) together represented almost 40 percent of the federal budget, or about 8.5 percent of GDP, in fiscal year 2006.The Congressional Budget Office’s (CBO) long-term projections suggest that by 2015, Social Security, Medicare, and Medicaid (for long-term care payments) will increase by about 2 percentage points of GDP, totaling 10.5 percent, while by 2030, according to CBO, these expenditures will be as high as 15 percent of GDP.1