My candidate is the broad array of impacts on the economy driven by a secular shift in demographics. We are in the early stages of a rising elderly dependency ratio, a decline in population of both the peak earning cohort. And to make matters worse, the US birth rate is now at a historic low (see the Pew Research finding).
Here is a visualization of the demographic shift: The ratio of the elderly (65 and over) to the peak earning cohort (age 45-54). The chart below, based on Census Bureau historical data and mid-year population forecasts to 2050, illustrates this rather amazing shift.
The year 2013 is an inflection point in the chart above, with the elderly cohort dramatically increasing in numbers. The ratio of the two, the blue line in the chart, peaked in 2007 and began its long rollover in 2008, coincident with the beginning of the last recession. We have many years to go before this ratio approximately levels out around 2030.
Even more disturbing is the broader measure – the “elderly dependency ratio.” This is the label given by demographers to the ratio of the 65 and older population to the productive workforce, which for developed economies is usually identified as ages 20-64. The next chart illustrates the elderly dependency ratio with Census Bureau forecasts to 2050. Note that in this chart I’ve followed the general practice in demographic research of multiplying the percent by 100 (e.g., the mid-year 2013 elderly dependency ratio is 23.3% x 100 = 23.3).
As the chart painfully illustrates, the elderly dependency ratio is in the early stages of a relentless rise that doesn’t begin to level out until around 2036, over two decades from now.
I’m quite aware that my “worry” candidate probably goes beyond the usual responses to this sort of question. The general tendency is to focus on near term risks – recessions, another asset bubble, the uncharted territory of Fed policy, another major market decline, the potential for a military conflict between China and Japan, etc.
My concern is about an inevitable slow-motion driver of unpredictable changes, many of which will be the result of intergenerational conflict as the burden of unfunded entitlements increasingly hampers the financial prospects of younger Americans.
And there’s a major complicating factor to my demographic concerns. These changes are occurring during an era of stunning technological advances that have increased business efficiencies and reduced employment needs. The labor force participation rate reflects these changes (more so than the unemployment rate itself):
A painful but not-surprising byproduct of these trends is the decline in household incomes:
I used the word “secular” in my opening comments to emphasize that my concern is with long-term changes as opposed to cyclical ones. The impact of our shifting demographics, especially when combined with technological advances, will change our culture and economy in ways that will challenge government policy makers for many years to come. Unfortunately, policy processes in the US are not well suited to dealing with secular changes.
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