By Rich Miller
The only things you can count on in life, or so the saying goes, are death and taxes. But when it comes to economics and government budgets, perhaps the only thing that's for sure is demographics. And right now, for the U.S., and particularly other major industrial nations, those demographics look daunting. Just ask Federal Reserve Chairman Alan Greenspan.
In the U.S., the growth rate of the working-age population is expected to drop to about 0.25% annually by 2035 from 1% now. That sharp slowdown will cut into economic growth and curb government tax receipts. At the same time, the percentage of the population over 65 years old will rise significantly, to 20% by 2035 from 12% now, boosting government outlays on retirement benefits and medical care for the elderly.
That's why, in his opening speech at the Kansas City Federal Reserve's annual retreat in picturesque Jackson Hole, Wyo., Greenspan focused his talk on the tough policy choices that lie ahead for an aging society. It's a theme he has struck before. But at Jackson Hole, the Fed chief sounded a bit more hopeful than he has in the past that a flexible and resilient U.S. economy will find ways to cope with the destiny of demographics.
"While I do not underestimate the difficulties that we face in the U.S., I believe that, given the political will, we are better positioned than most others to make the necessary adjustments," Greenspan said at the start of a two-day conference focusing on demographics and its economic impact.
What's behind the Fed Chairman's guarded optimism? Well, he made clear that no silver bullet exists to solve the problems ahead. But he pointed to a variety of factors that suggest the situation may not be as dire as some of the doomsayers portray.
A decline in the labor force's growth has been a worry. But Greenspan noted that immigration could increase, just as it did in the 1990s in response to tightened labor markets. And advances in medicine make it possible for Americans not only to live longer but work longer as well. "To date, despite the improving feasibility of work at older ages, Americans have been retiring at younger ages," Greenspan said. "But rising pressures on retirement income and a growing scarcity of labor could eventually reverse that trend."
BABY BOOMER SAVERS?
How productive workers are will be critical in determining how well the U.S. can cope with the demographic challenges ahead. Greenspan cautioned -- as he has before -- that history suggests that the U.S. cannot maintain its recent "exceptional" growth rates of productivity indefinitely. But he also sounded hopeful that the country would find a way to make the investments needed to cope with a slower-growing labor force. "Our capital markets should allow for the creation and rapid adoption of new labor-saving technologies," the Fed chief said.
Of course, how much a country can invest depends in the long run on how much it saves. For years, the doom and gloomers have been bemoaning the paltry savings being socked away by baby boomers. But here again, Greenspan seemed to look on the bright side. If that generation behaves like their parents did, they'll spend less and save more in retirement than many fear, he suggested.
Greenspan certainly wasn't complacent about the challenges ahead. He made clear in his speech that Social Security and Medicare benefits will have to be curbed to ensure the programs' solvency in the future. And the sooner that happens, the better. But as long as politicians rise to the occasion, Greenspan has faith that the U.S. will defuse the demographic time bomb ticking under the economy.
Miller is a senior writer in BusinessWeek's Washington bureau and is in Jackson Hole for the Fed's conference