Economics

23 Pages 5773 Words

Introduction
The nation is about to experience an enormous demographic shock. Between 2010 and 2030, the over-65 population will rise by 70 percent while the labor force will rise by a little over 3 percent. The Congressional Budget Office (CBO) projects that Social Security benefits will be absorbing 3 percentage points more of the GDP by 2040 while Medicare and Medicaid will be absorbing an additional 6 percentage points.

The Implications of Doing Nothing
The economic burdens estimated above assume that labor productivity continues to grow in the long run at a rate slightly above that of the last twenty years. This is in the face of massive waves of retirement among the most experienced members of the labor force. Moreover, the remaining laborers will probably have less capital to work with, because there will be large withdrawals from private pension funds, and public deficits will rise if promised benefits are paid without raising taxes. In addition, we are unlikely to be able to borrow as much from foreigners as we do currently, because all developed nations will be facing similar problems.

The CBO has described a disaster scenario in which rising Federal deficits reduce capital formation, thus slowing growth.1 The slow growth raises deficits further, thus slowing growth further. The process continues until the economy collapses into nothingness.

This will not happen, because we shall be forced to alter policies. The only choice is whether to alter policies sooner or later.

It is not only public policies that are likely to change. Private firms, faced with shortages of experienced labor, will have to reform current practices that favor early retirement. Private sector adjustments to keep older workers in the labor force can be complemented by reforming public policies that now promote early retirement. Such policy reactions will mute the decline in labor force participation and reduce the decline in economic growth. N...