Challenges of an Aging Society
The federal government levies taxes on workers to provide Social Security benefits to the elderly. While this program constitutes the overall federal budget, its system of funding is unique in that it differs from other programs. Its spending is financed from two trust funds that are credited with the dedicated tax revenues and from which benefits may be paid, without further legislative action, as long as the trust funds have sufficient balances. The aging of the US and world population has caused grave concern among expert about the ability of developed and developing nations to afford the programs that benefit the retired population, especially public pensions, and health insurance. The costs of Social Security, Medicare, and the federal share of Medicaid are projected to increase by 15% in the next five years. This poses the daunting challenge of how to various governments will succeed in meeting the economic goals and benefits of aging population too.
Even with the organized fiscal stimulus, many countries are experiencing mired stagnation. It would be plausible to contend that in the absence of a sustained recovery in investment and output, expansionary fiscal and monetary policies have prevented a full-scale descent into a deflationary spiral. For instance, Japan continues to enjoy the luxury of financing its public debt from private savings, while the vast majority of her debt is denominated in its own currency. Japan’s secular stagnation has therefore imparted a burgeoning public debt burden, growing from 15% in last five years. Still, demographic aging, by hugely increasing the share of the population that will be retired and liquidating its saved assets relative to the number of working age savers, will pull down the saving rate.
Pension reform is not simply about increasing the saving rate to boost investment and growth, but if reform is not simply to redistribute the burden across generations it has to do that at least. This increase in saving can be brought about by changes to the pension system itself, fiscal retrenchment, or both. The effect of aging on saving also depends on how policies respond to the challenge of aging. For instance, if the government raises taxes to finance higher pension expenditure, income is redistributed from the high-saving working-age population to low saving or dissaving pensioners so that the negative effect of aging on household saving is exacerbated. If instead pension reforms reduce the generosity of public pensions, people have to save more for their old age which could boost saving of younger generations.
Ageing is taken to affect macroeconomic variables in three main ways, through a change in consumption propensities as the population ages and the dependency ratio rises, through a decline in potential output as the labour force shrinks, and through an increase in government expenditures as pension and medical benefits increase. Raising wages decrease the demand for labor, whereas an increase in labor demand shifts the wages upwards.
When the aging population starts to retire and consume their assets, per capita consumption becomes higher than per capita income. As the elderly dependency ratio declines, pension expenditures in percent of GDP decline. That would allow the government to either moderate debt or cut taxes. The simulation assumes a cut in taxes which boosts disposable income and consumption. These results hold as long as the average productivity of aged persons is similar to that of the total population, and their propensity to use publicly provided benefits is also similar to average. However, the per capita real GDP, and consumption returns to the baseline. Nonetheless, both conventional and individual accounts reforms must themselves increase saving or be accompanied by measures that increase saving or boost productivity if they are to help mitigate the financial and macroeconomic consequences of aging