Only Growth Will Ease Our Economic Future

No small amount of energy and intellectual effort is devoted to determining what impact climate change will have, or on scanning the heavens for a near-Earth object bound for collision with Earth. These are noble and important pursuits, but there is another disaster facing the country no serious person disputes.

While it is not quite as certain as the sun rising tomorrow, the next few decades will bring a demographic time bomb. Baby boomers are by Census Department definition are those born between 1946 and 1964, the fecund product of millions of young Americans during that period more than compensating for the Great Depression and World War II.

During their working lives these boomers have made it possible to fund social security and Medicare with modest levels of taxation. In part because this cohort was so large, in part because baby boomers had fewer children, and in part because the life expectancy is increasing, the number of workers required to support as single retiree has decreased from over six in 1941 to about 3.5 today. After 2020, this number will fall below three. No matter how wealth is divided and re-apportioned, workers will be burdened with the support of the elders. The problem grows worse if you factor in Medicare and if don’t believe the recently-adopted health care plan will reduce the cost of medical care.

The number of people we will have in the country (except if we accept even larger rates of immigration) available to support the elderly is fixed. There are at least a couple of ways of mitigate the potential economic and social disaster.

One is delay retirement. This will increase the worker to retiree ratio. If the retirement age were 70 now, the number of available workers would be over 5 per retiree.

Secondly, the Boskin Commission reported that the traditional CPI over states inflation by about one to 1.3 percentage points each year. If the CPI increases by 2% the real rate of inflation is closer to 1%. If the inflation adjustments to Social Security were accordingly adjusted, it would medicate the burden of Social Security over time.

These last two suggestions, however, are essentially different ways of allocating a finite set of resources. In such cases, there will be incredible political battles between generations. The only way to alleviate that problem is robust economic growth. Taxes and other economic incentives must be structured to foster growth. With higher rates of growth, it is possible to both alleviate both the reductions in benefits the elder will have to bear as well as decrease burden on workers.

Real growth rates have averaged about 3.5%, and we will need sustained growth rates more than 4% to prevent long-term decreases in the standard of living. Unfortunately, real growth rates might be constrained by increased entitlements and higher deficits enacted by the Obama Administration. Potential constraints on energy output imposed to mitigate climate change will also slow growth.

Growth is the only socially stable way out of the upcoming fiscal crisis and it does not seem that the current Administration is willing to pay much more than lip service to the notion.

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