The twilight of the US baby boom generation is approaching, and with it deep, structural economic shifts whose impact will be felt for decades to come.1New research from the McKinsey Global Institute (MGI) shows that there is only one realistic way to prevent aging boomers from experiencing a significant decline in their living standards and becoming a multidecade drag on US and world economic growth. Boomers will have to continue working beyond the traditional retirement age, and that will require important changes in public policy, business practices, and personal behavior. These adjustments have become even more urgent with the recent financial turmoil, which has sharply reduced the home values and financial investments of millions of boomers just as they approach retirement.
Underlying the need for change is a reversal of trends that have been in operation since the 1960s. For decades, boomers swelled the ranks of the US labor force, driving up economic output as they earned and consumed more than any other generation in history. Now, as the boomers age and retire, US labor force participation rates are declining. Without an unexpected burst of productivity growth or a significant upsurge in investment per worker, the aging boomers’ reduced levels of working and spending will slow the real growth of the US GDP from an average of 3.2 percent a year since 1965 to about 2.4 percent over the next three decades. That long-term growth rate is 25 percent lower than the one the United States and the world have long taken for granted.
I think this is just one of the reasons American economic growth will slow.
MGI research highlights a further problem: two-thirds of the oldest boomers are financially unprepared for retirement, and many are not even aware of their predicament.2 This lack of sufficient resources will not only mean a less comfortable retirement for tens of millions of households but also depress spending in the overall economy.
Yet the boomers’ retirement need not be such a major dislocation. We estimate that a two-year increase in the median retirement age over the next decade would add almost $13 trillion to real US GDP during the next 30 years while cutting roughly in half the number of boomers who would be financially unprepared for retirement.
Our research shows that many boomers actually do want to continue working. Nonetheless, a number of institutional and legal barriers—health care costs, labor laws, pension regulations, and corporate attitudes toward older workers—could prevent them from prolonging their careers. Overcoming these barriers will require the government to reallocate health insurance costs for older workers, businesses and boomers to agree on more flexible work arrangements, policy makers to reform private pensions, and Social Security to remove disincentives to remaining in the workforce.
Some of those corporate attitudes toward older workers are, unfortunately, quite rational. Older workers have more physical disabilities and are less able to learn and remember. Aging brains lower productivity. We really need oligodendrocyte cell therapy to repair our aging myelin sheaths and reverse at least part of brain aging.
They see declining labor force participation as a cause of slower economic growth. That's incredibly important. A more rapidly expanding economy will generate more tax revenues at lower tax rates. A slower economy will require much higher taxes to meet the same entitlements commitments.
Labor force participation has declined to 66 percent today and is headed, according to our research, toward 60 percent by 2035—a level not seen since the 1960s. If labor productivity and capital growth continue on current trends, declining labor force participation will knock real GDP growth down to 2.6 percent from 2007 to 2016, to 2.4 percent from 2017 to 2026, and to 2.2 percent from 2027 to 2035. A slowdown of this magnitude would represent a structural shift for the US economy and leave it with growth rates typical of Europe’s in recent decades.
The labor force problem is even worse than that because of other demographic changes to the American workforce. Academic performance is on the decline. More schooling isn't helping. This problem will not improve with time.
|Share |||By Randall Parker at 2008 November 03 09:37 PM Economics Demographic|