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The Population Cliff
by Perry A. Novak
Demography, the statistical
study of living human
populations, is one
of those detail laden subjects
that just doesn’t lend itself to
much excitement, but demographic
change is about to have a profound
impact on the U.S. economy.
Here Comes the Baby
Boom
Population change normally occurs
at a glacial pace, unless there
is an extreme outside influence.
World War II was just such an influence,
increasing the U.S. birthrate
by more than four million annually
in the years following the war.
From 1946 through 1964 there were
75 million births which gave rise to
the term “baby boom.”
When it comes to us boomers, no
single group has had quite as profound
an impact on the U.S. economy
as we have. Boomers, who now
range in age from 49 to 67, control
over 80 percent of all personal financial
assets, and account for more
than half of all consumer spending.
We are responsible for 80 percent of
leisure travel, 77 percent of prescription
drugs and 61 percent of overthe-counter
drugs.
The rise of the baby boom has
caused tremendous growth in the
U.S. economy, from the housing
boom that started in the 1950s, to
the creation of suburban living that
changed the face of a previously
agrarian nation. Unfortunately, the
rapid retirement of the baby boom
will accelerate some of the country’s
most serious financial problems.
Most of our large-scale consumptive
spending occurs between the
ages of 40 and 55, as we build our
families and acquire the items we
seek to make our lives more comfortable.
After that, and especially
as we approach retirement, our consumptive
spending declines sharply.
Consumer spending accounts for
roughly 71 percent of U.S. gross domestic
product (GDP). That is why
the government usually deals with
economic crises by trying to encourage
consumers to spend. The changing
demographics of the U.S. economy
mean there will be fewer people
in a position to spend us back to a
robust economy.
The second, more dramatic problem,
is really two sides of the same
coin. When we retire, we stop paying
into programs like Social Security
and Medicare and start taking out
benefits. The money starts flowing
the other way, so the costs of these
programs rise dramatically just as
their income is falling off sharply.
More than 10,000 boomers a day
began retiring in 2011 and that
cycle will continue for most of the
next two decades. More than 36
percent claim they have nothing in
retirement savings and 35 percent
of those over age 65 are relying entirely
on Social Security for their retirement
income. An AARP survey
found that 40 percent plan to work
until they die because they did not
plan or save for retirement.
Social Security: Past and
Present
The Social Security program was
created in 1937 and began paying
regular benefits to retirees, age
65 and older, in 1940. At that time,
however, average life expectancy in
the United States was just 58 years.
If someone actually did live to age
65, their remaining life expectancy
was 12.7 years for men and 14.7
years for women.
When the program began, it covered
workers but not spouses or
dependents. It covered roughly 60
percent of the active workforce and
provided a benefit equal to 26 percent
of pre-retirement income. According
to the 1940 census, there
were only nine million Americans
age 65 or older, and only a small
fraction of them received benefits.
The program was originally adopted
to aid retirement only. It did
not include disability payments or
Medicare, both of which were added
much later.
Fast forward to 1990, and the
numbers had changed dramatically.
The number of Americans age
65 and older had climbed from nine
million in 1940 to 34 million, comprising
13 percent of the U.S. population.
Life expectancy had climbed
as well. An expansion of the original
law now covered 96 percent of
the workforce versus the original 60
percent and benefits as a percentage
of pre-retirement wages had
climbed from 26 percent in 1940 to
45 percent in the 1990s.
The increased number of retirees,
living longer and receiving larger
benefits as a percentage of their preretirement
wages, has resulted in
the payroll tax rate being increased
over 500 percent since the program
first began. Fully 80 percent of
American workers pay more in payroll
taxes than they pay in income
taxes. That is why the federal government
temporarily reduced the
employee rate two years ago in an
effort to influence consumer spending
and jump-start the economy.
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MARCH 2013