Demography and Productivity

One of the hardiest of all the arguments for “entitlement reform” is that demographic factors (notably the size of the baby-boom and baby-bust generations) make current retirement programs inherently unsustainable. It’s also part of the even more ancient Decline of the West hypothesis that selfish, non-procreative Americans and Europeans are doomed to be overwhelmed by the fecund hordes of the Global South (and/or by religious fundamentalists there or here), an argument that made a highly visible appearance in a recent Ross Douthat column.

But getting back to the narrower proposition that falling birthrates represent an unavoidable fiscal and economic calamity if not the Judgment of God on Infidels, Dean Baker had a tart response over the weekend that tosses the question of intergenerational burdens back to entitlement reformers like a returned hand-grenade:

Fans of arithmetic might note that the ratio of workers to retirees fell from 5 to 1 in the early sixties to 3 to 1 in the early 90s. This sharp drop in the ratio of workers to retirees did not prevent both workers and retirees from enjoying substantial improvements in living standards over this period. The reason is that productivity growth, what each workers produces in an hour of work, swamped the impact of a falling ratio of workers to retirees.

That will also be the case as the ratio of workers to retirees falls from the current 3 to 1 to a bit under 2 to 1 over the next 23 years under any plausible assumption about productivity growth.

[U]nder any plausible scenario the potential gains to living standards from increased productivity swamp any potential negative impact from a declining ratio of workers to retirees. And these calculations do not even take account of unmeasured benefits of slower population growth, like less pollution and reduced strains on the infrastructure. It is also important to remember that these numbers show the absolute largest impact of demographics. If we were look out another 10 years to 2045, the demographics would not change, while productivity would continue to raise living standards.

The problem with offsetting a declining ratio of workers to retirees with productivity gains, of course, is that these gains have in recent years been harvested almost exclusively by those at the top of the wealth-and-income ladder.

In short, the idea that demographics will impoverish our children and grandchildren is absurd on its face. Readers may rightly note than most workers have not see the gains of productivity growth over the last three decades, but this just highlights the importance of intra-generational distribution. The impact of battles over distribution of income within generations will dwarf the impact of battles over distribution between generation.

So if you’re worried about the actual impact of demographic changes on living standards, the place to look for relief is at the distribution of productivity gains–unless you simply want to use the “unsustainability” of retirement benefits to cut them as an ideological end in itself.

Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.