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Demography Matters

Author: Douglas Holtz-Eakin
December 1, 2006
Council on Foreign Relations

Demography matters. In the broadest terms, every country is experiencing a drop in fertility, a decline in infant mortality, and a rise in longevity. One result is that global population growth is slower—total population will rise by roughly one-half in the 21st century instead of the four-fold increase in the past century. The second result is that the globe is aging. In 1950, the median age in the developed world was under twenty-nine years.  By 2050, it will have risen to over forty-six years.  Developing countries face similar population dynamics.

For the United States, demography affects every facet of policy.  Most obviously, immigration policy matters.  The U.S. native-born population is experiencing fertility below the replacement rate, so immigrants are the source of all future increases in population.  For the same reason, the size of the future labor force, the level and composition of its education and skills, and its ability to compete in international markets are part and parcel of immigration policy. 

At the same time, there is concern about the homeland and national security aspects of immigration, legal and otherwise.  Most vividly, just before leaving Washington for the elections, Congress authorized construction of 700 miles of fencing along the southern border of the United States intended to help mitigate flows of illegal immigrants. 

An aging population is at the heart of the United States’ most pressing and vexing domestic policies: the projected rise in spending on entitlement programs.  If left unaltered, spending on social security benefits will rise with the retirement of the baby-boom generation from about 4.5 percent of GDP now to 6.5 percent of GDP in 2030, and then continue to drift north to about 7 percent of GDP for the foreseeable future.  More threatening is the growth in Medicare and Medicaid.  For the past four decades growth in spending per beneficiary has exceeded growth in GDP per capita by 2.5 percent.  The combination of this spending trend and the new demography will drive spending on these federal health programs from 4 percent of GDP to 22 percent of GDP in 2050—larger than the entire current federal budget!

While these are conventionally thought of as “domestic” economic policy issues, the future of the entitlement programs is tied intimately to the U.S. international and national security agenda.  The Council recently cosponsored a conference on “Global Aging and Financial Markets” to examine the myriad potential influences of demography.  The broad consensus emerging from the conference was that fiscal impacts—the success or failure in reforming spending to accommodate new demography—was the largest and most direct channel by which demography would affect global capital flows, investment patterns, interest rates, and stock returns. 

Because the U.S. is not alone in experiencing demographic shifts, it is not alone in facing fiscal pressures.  Japan and much of Europe are well ahead of the U.S. in aging, and face similar fiscal problems.  The United States must demonstrate the imagination and effectiveness to reinvent core social programs; that is, to be a leader in the face of a wave of global demographic shifts. 

If so, U.S. economic performance will continue to outstrip its international competitors.  From a financial perspective, more appropriate entitlement programs would go hand in hand with greater national saving, which translates directly into reduced pressure on international borrowing, lower current account deficits, and a reduced accumulation of U.S. securities in the hands of foreign government entities. From a broad economic perspective, the same saving will fuel greater productivity growth and an enhanced ability to support the broad portfolio of U.S. programs in foreign aid, diplomatic outreach, security preparedness, and military operations.

Put differently, an effective response to demographic shifts will determine the United States’ ability to support its national security objectives.  Similarly, the effectiveness of responses around the globe—in Europe, Japan, and elsewhere—will have a commensurate impact on that capacity of the United States’ traditional allies to support U.S. goals. 

The old saying goes that “demography is destiny.”  Perhaps not, but policy response to demography will determine destiny in the United States and around the world.

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