Business In News
Transitions between eras are only sometimes easily identified. Historians didn’t identify the coming of the Industrial Revolution until decades after it began. By contrast, the start of the Atomic Age can be dated to the second that the first atom bomb exploded over Hiroshima, and it took only hours for the world to know that humanity had entered a new era.
Much of the developed world has recently moved into a new era that historians likely won’t name, and the general public won’t notice for a decade or so: the Age of Decline. Japan, Greece, Italy, Portugal, Russia, Germany, Spain, South Korea, and China, along with thirty other developed countries, are projected to see their populations decline in 2023. Hong Kong, Finland, Taiwan, France, Austria, Belgium, Netherlands, United Kingdom, Denmark, and the United States, among another thirty-three countries, will see their populations grow by less than one-half of one-percent. For most of the developed world and the major population centers, population growth has largely stopped.
While this may come as good news to those who fear overpopulation, theory and evidence indicate that we have far more to fear from declining populations. As the economist Julian Simon pointed out four decades ago, humans are the ultimate resource, because they create resources where none existed before. All of the resources that make our modern, comfortable lives possible, from energy to transportation to communication to refrigeration to climate control to pharmaceuticals, are the results of human ingenuity. It’s no wonder that as the world population exploded, so too did our resources.
The Age of Decline will pose a particularly difficult problem for countries like the United States that rely on younger workers to support retirees. The latest Census figures project that within the next seven years, net migration into the United States will exceed the country’s natural population growth, making us, for the first time in almost 150 years, dependent on immigration for our population growth. Even then, the Census projects that the US population growth rate will fall (permanently) below one-half of one-percent within the decade.
For decades we’ve known the implications for Social Security. In 1960, there were more than five workers paying into the system for each Social Security recipient drawing out. Today, it’s fewer than three. And that number is expected to fall to two within ten years. In short, we need today’s average worker to contribute to Social Security two and a half times what the average worker of three generations ago contributed.
Changing demographics are not only placing a greater burden on workers, but also making it less and less possible to institute needed changes. As the ratio of workers to retirees declines, so too does the voting power of those workers. People aged 53 and older are either receiving Social Security, and so not interested in reforms that involve cutting benefits, or are close enough to receiving Social Security to be less interested in reforming the system to their own future detriment. To further stack the deck against them, younger workers are less likely to vote than are the elderly. In the extreme, if all likely voters aged 52 years old and younger supported cutting Social Security benefits and all likely voters aged 53 and older opposed cutting benefits, then in a vote held today, a “cut benefits” proposal would win by a scant 51 to 49 percent. In another seven years, it would be a dead heat. From 2030 forward, the demographic shift toward the elderly makes it impossible for the “cut benefits” option to win. And that assumes that voters aged 52 and younger would be unanimously in favor of cutting Social Security benefits. In fact, almost 80 percent of working age Americans say Social Security benefits should be preserved, even if it means raising payroll taxes.
Unfortunately, the laws of arithmetic trump both political rhetoric and wishful thinking. The Social Security Board of Trustees estimates that with no changes, Social Security will run a $2.5 trillion deficit over the course of the next decade. To eliminate that deficit would require either cutting Social Security benefits by around 25 percent or raising payroll tax revenues by around 25 percent, or some combination of the two. Of course, the federal government could always borrow to fund the Social Security deficit, but that doesn’t eliminate the deficit so much as move it from one set of government ledgers to another. No matter what we choose to do, taxpayers are going to pay the price. The question that remains is which taxpayers. Given the polling data and the shifting demographics, the answer appears to be the working taxpayers.
An oft-repeated possible solution is to remove the cap on payroll taxes. The danger there lies in imposing a significant cost on budding entrepreneurs. Households with at least one income, and a side business that has grown enough to provide significant income but not enough to be a full-fledged business, are more likely to be earning (or anticipate soon to be earning) near the Social Security payroll tax cap (currently $160,000). As business owners must pay both halves of payroll taxes (employer and employee), removing the payroll tax cap imposes an additional 12.4 percent tax on business owners’ earnings beyond $160,000. This will create a disincentive for entrepreneurs to grow their side businesses enough to support employees. A more entrepreneur-friendly change of keeping the $160,000 cap, but then removing it for earnings above $250,000, would raise less than half of what’s needed to close the Social Security deficit.
Both the economics and the demographics lean toward placing the growing Social Security burden on the backs of workers. A stagnating population will make that burden both more financially onerous to bear and more politically difficult to alleviate. Meanwhile, slowing population growth ultimately means slower economic growth. In short, the problem only gets worse as time goes on.
It’s no coincidence that the United States grew from a small agrarian nation to an economic superpower over the same century and a half that its population grew thirty-fold. But that era has ended. The United States, and much of the rest of the developed world, has entered the Age of Decline. As population growth in developed countries slows, economic innovation and growth will slow also. This will place greater burdens on already-burdened retirement programs. The shift from a younger population to an older population will ensure that the bulk of that burden falls on the young, ultimately making it more expensive for them to raise children of their own, thereby further exacerbating the shift.
Having survived the Atomic Age without blowing ourselves to bits, and having generated wealth beyond imagining throughout the Information Age, we enter the Age of Decline and find ourselves victims of our own success. History tells us that impoverished societies die by war and famine. Now we are learning that prosperous societies die by attrition.