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A primer on the macroeconomic implications of population aging

  • Louise Sheiner
  • Daniel E. Sichel
  • Lawrence Slifman

The composition of the U.S. population will change significantly in coming decades as the decline in fertility rates following the baby boom, coupled with increasing longevity, leads to an older population. This demographic shift will likely have a dramatic effect on the long-run prospects for living standards. Moreover, as has been widely discussed in the media and by policymakers, population aging also has significant implications for social programs for the elderly, such as Social Security and Medicare. In this paper, we discuss the consequences of population aging from a macroeconomic perspective and consider alternative paths the economy could follow in response to population aging. The choices society makes among those alternatives will be closely linked to decisions about how to reform entitlement programs for the elderly. The fundamental conclusion of our study is that, barring a significant increase in labor force participation, population aging will lead to a reduction in per capita consumption relative to a baseline in which the demographic composition of the population does not change. The size of any consumption reduction depends critically on whether the adjustment happens sooner or later and on whether the labor force participation of the elderly changes. Important policy questions, then, are whose consumption path falls, by how much, when, and by what means? Decisions about Social Security and Medicare reform are integrally bound up with these fundamental policy questions.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2007-01.

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Date of creation: 2007
Date of revision:
Handle: RePEc:fip:fedgfe:2007-01
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  1. Douglas W. Elmendorf & Louise Sheiner, 2000. "Should America save for its old age? Population aging, national saving, and fiscal policy," Finance and Economics Discussion Series 2000-03, Board of Governors of the Federal Reserve System (U.S.).
  2. Douglas W. Elmendorf & Louise M. Sheiner, 2000. "Should America Save for Its Old Age? Fiscal Policy, Population Aging, and National Saving," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 57-74, Summer.
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