Are ageing and the economic slowdown linked?

Washington

AN ageing America reduces the economy's growth - big time. This is the startling conclusion of a new academic study, and if it withstands scholarly scrutiny, it could change our national political and economic debate.

We've known for decades, of course, that the retirement of the huge baby-boom generation - coupled with low birth rates - would make the United States an older society. We have also known that this would squeeze the federal budget. Social Security and Medicare spending would grow rapidly, intensifying pressures to cut other programmes, raise taxes or accept large budget deficits. All this has come to pass.

But the new study goes a big step further, claiming that the fact that the United States is an ageing society weakens economic growth. It noted that the fraction of the United States population age 60 or over will increase by 21 per cent between 2010 and 2020; this ageing shaves 1.2 percentage points off the economy's present annual growth rate, the study estimates. Although this seems small, it's enormous. Consider the numbers. From the 1950s to 2007, the economy (gross domestic product) grew about 3 per cent a year, sometimes a little more, sometimes a little less; by contrast, annual growth since 2010 has averaged about 2 per cent. But add in the 1.2 per cent annual growth lost to ageing, and we're roughly at 3 per cent growth again.

If other economists confirm the study, we could resolve the ferocious debate about what caused the economic slowdown. The ageing effect would dwarf other alleged causes: a lag in new technologies, rising economic inequality; debt hangover from the housing bubble; over-regulation by government; heightened risk aversion by shoppers and firms, reflecting the legacy of the Great Recession.

In effect, demographics rule. The theory's added appeal is that it might apply globally, because almost all advanced countries are experiencing both ageing populations and slower economic growth. This implies - but does not automatically prove - a common cause.

Still, it won't be easy to convince other economists that ageing explains most of the economic slowdown. The theory may strike many as being too simple. Brookings Institution economist Gary Burtless, for instance, said: "I start with a strong skepticism that one factor explains where we are."

Co-authored by economists Nicole Maestas of Harvard and Kathleen Mullen and David Powell of the Rand Corp, a think tank, the study on ageing compared US states with fast- and slow-growing elderly populations. States with the fastest increases in the ranks of the elderly also had the weakest economic performance. These relationships then formed the foundations for the study's broader conclusions. (The study was recently released as a working paper of the National Bureau of Economic Research.)

Generally, ageing poses two possible adverse economic effects. One is uncontroversial. As swarms of retirees leave the labour force, there are relatively fewer workers to support production. This hurts economic growth, but it represents only one-third of the slowdown, the study estimates. The other two-thirds reflects reduced productivity; workers become less efficient. Not just older workers - all workers. That's surprising, and there is no clear answer as to why. This is the study's weak point. The conclusion rests on data that can't be explained.

There are theories. It could be that as experienced workers retire, their positive effect on the work climate is lost. Mr Powell said: "If I'm working with someone who is relatively unproductive, I may become less productive."

Although this is plausible, it's also guesswork, he admits. It is also partly undercut by Mr Burtless' research, which found that the most skilled older workers stay in their jobs longer.

Or it may be that as societies age, they become more cautious. Their members value stability and security, and are more restrained and less experimental. If these values strengthen as people age, they may impose a stand-pat, conservative bias on businesses and households.

On the whole, the study is bad news. One way advanced societies can handle greying populations is through faster growth, which enables younger generations to pay the elderly's benefits without sacrificing too much of their own incomes. But if ageing causes slower economic growth, this avenue is of limited help.

As a society, we need a better balance of obligation between the older and younger generations. Until now, policy has favoured the elderly. The remedies to shift the balance are well-known - higher eligibility ages for government benefits, less generous benefits and tax breaks for wealthier retirees. None is politically easy. If slower economic growth is linked to ageing, the competition for scarce funds will become even harder. It's a dismal connection. THE WASHINGTON POST WRITERS GROUP