The Baby Boom Crunch, part 1

According to the doom peddlers and their faithful scribes in the popular press, Medicare and baby boom retirements will be the one-two punch that puts our grandkids in the poorhouse.  If I remember their message correctly, our grandkids' tax rates will have to be a hundred percent or so just to cover the interest on the debt; there won't be anything left for national defense, education, or social security—let alone for building walls to keep people out, or for subsidies to automakers for reducing CO2 emissions.  In short, it sounds bleak.  And it's all my generation's fault... supposedly, anyway. 

So, I decided it was time to look into this topic, too.  [Whenever I do that, surprises invariably surface.]  This article is the first of two or three (TBD); It's just a concise depiction of the demographics problem everyone has been fretting about.  The two charts below show that, when we baby boomers retire, we will automatically increase the percentage of social-insurance-collecting retired people, and reduce the proportion of FICA-paying working-age people. 

The US Census Bureau has projected the population two ways: total including net immigration, and total assuming zero cross-border migration.  The boomer crunch happens largely between 2010 and 2030.  If zero migration is assumed, the crunch is more pronounced—obviously because there would be fewer working-age people to produce the goods and services necessary to support my generation in our retirement years (to the degree we so richly deserve). 

Contrary to what we hear from the popular press, the important question is not "How much will we have to raise taxes, assuming GDP growth of 2.5%?"  The important question is, "What kinds of productivity growth, income growth, and taxation structure would make this problem go away?" 

I'll be ready to tackle that question in a few days.

Comments

[Counter Revolutionary]

Sorry, Steve, but don't think too much of the Census data. 20+ years out they stop predicting. Nothing changes? Hasn't happened. Won't happen.

But am really waiting for the next article re: growth.

[pawnking]

Nothing changes quite so quickly as present predictions of the future.

[Brad S]

What's really interesting is that some states, like South Dakota, have working-age populations of less than 60% as of the 2000 census. And South Dakota's GSP has been growing at a FASTER rate than the national pace since 2000.

[Steve]

CR and pk:
Both of you are correct; any projections more than a few years into the future should be viewed as just one of many possibilities.

I wish our politicians, journalists, and Comptroller General would act that way. I wish their journalist audiences would react to them that way, instead of being awe-struck lemmings. I wish the doom peddling politicians were challenged on their single-scenario gambit more frequently [http://tinyurl.com/yr7g4b].

I wish, I wish, I wish.

But that's not what's happening, is it?

So, I'm going to use the same demographic data they use. I'll do a sensitivity analysis that reveals how the economic outcome changes as a the key assumption about productivity changes. Then we'll compare their single-scenario doomsday conclusion with a few other possible scenarios.

At that point, we'll have a better basis for deciding what are the right questions to be asking the doom peddlers today. [I, for one, think we should be asking them how they plan to enhance the private sector's ability to grow the economy -- instead of asking them how high they need to raise our tax rates today to prevent their projected single-scenario disaster 30+ years from now. That's where I think this will come out.]

But we'll see in a day or two, after I finish building the model and testing the sensitivities.

[Steve]

The link above doesn't work. Here's one that does (regarding "the single-scenario gambit"}:
http://tinyurl.com/yr7g4b

[Ariah]

As you're about to explain, the demographic shift above is far from catastrophic. However, an easy way to avoid it in the first place would be as follows -

Pick a few heavily pro-American Asian nations, like India, South Korea, and the Philippines. Inform them that for the next five years, we'll take anyone with a Master's degree from an accredited university who doesn't have a criminal record and can pass our security screening process.

The population problem would be solved. The influx of new immigrants would more than make up for the number of new retirees, and the higher-than-American birth rates of the Indians and Filipinos would increase population growth for at least a generation afterwards.

Furthermore, the increased number of highly educated (and disproportionately entrepreneurial) workers would be an overall boon for the economy.

Of course, legislation like that could never pass through Congress anyway. But I can dream.

[Bob]

Steve,

Will you be providing any comparisons between doomsday and alternatives? It would be interesting to see what the negative projections look like side by side with something more positive.

[Steve]

Bob:
A model that recreates the doomsday scenario, given the right inputs, is one of the sanity checks on its validity. When I can do that, I'll be ready to start running different scenarios. I'm not quite there yet, but I can already see that productivity per worker is by far the most significant variable -- which shouldn't be much of a surprise.

[Matt]

Ariah,

That's a fantastic idea. It could not only potentially solve (or help to solve) the "Baby Boom Crunch" problem from an economic standpoint, but could also vastly affect this country in a positive way from a social standpoint. I don't necessarily think a population increase, as a sole means, would be the saving grace to this issue. However, the fashion in which that population increase is brought upon (such as the manner you proposed) would no doubt be beneficial to our country. Then again, shouldn't we as American's concentrate on increasing the working force of our own people already here? Wisely invested ways to increase the education and gainful economic production of our own youth? But once again, America, as we know it today, was born as melting pot of different ethnicities, and that's what makes us the greatest nation in the world.

[John Rogers]

Like you, I believe that the Medicare crunch could practically be averted if we adopted high growth policies.

But unlike you, I'm not at all optimistic that this will happen.

Just take one look at the clowns in Congress.

I rest my case.

By 2040, they will have choked the oxygen out any creature that has the audacity to make a buck in order to pay off the hoardes of crabby seniors.

[Steve]

Matt:
A change in the immigration law and its enforcement is desperately needed. But the left and right resist any change (for different reasons). Most Dems want families, not skills, to be the basis for entry, because they view it as voting-block security. Many Repubs see immigrants as mouths, not minds, dismiss every practical proposal as "amnesty," and envision ballooning welfare rolls to be the result of any change besides an impenetrable wall keeping people out.

If political gridlock prevents any changes at all, the Republicans at that point will probably have turned themselves into a permanent minority party. See this article: http://tinyurl.com/33htht

[John in IL]

Steve,
I think you might enjoy this essay from a recovering doom peddler.

http://tinyurl.com/2tynml

[Aaron]

Perhaps instead of just Asian nations, the immigration opportunities could be extended to Europe and Africa as well, we'd end up with less of a problem with those who worry about the cultural ramifications.

[Steve]

John:
Thanks, that was funny. By the way, I'm betting that David Walker will be joining the authors on the doomsday book list (at the bottom of the article) soon after his term as Comptroller General is up. Just a hunch.

[Bob]

Steve,

There is a lot of "noise" coming from both parties about this new immigration "reform". I get the benefit of attracting all the bright minds and I think most of the population is in sync with that.

The uproar, as far as I can tell, is the complexity of the legislation and the lack of confidence in the government bureaucracy to enforce law that is currently on the books let alone some new monstrosity.

In other words, we should not cut off our nose to spite our face but we need to bring order in from the current chaos.

We have to do a much better job of securing the country.

[pawnking]

With regards to immigration, I don't see how the government can stop it. Really. Lincoln said once that with the public will, nothing can fail. Without it, nothing can succeed.

The public, by and large, wants immigration, despite all arguments against it. Nothing the government can or will do will make any difference at all but the smallest frames of reference.

[Bob]

PK,

The public acknowledges the role immigration plays in our economy. They don't want to stop legal entry but are opposed to illegal entry. By and large they don't favor deportation either.

It also depends on where you live. LA strongly opposes illegal immigration: LA is a mess by the way as well are many border towns.

Put another way, the will of the people is not being correctly addressed by the government. Rather, political bases, special interest groups and the elitists are calling the shots.

[Boghie]

What happens when:

The Baby Boomers 'retire' later and show taxable income upon 'retirement'.

They have very large capital gains in their homes and some have sizeable taxable assets in their retirement accounts.

And, much of these assets have been 'hidden' from Uncle Sam.

Maybe the end is not near!!!