Much has been written about changing demographics, and the rise of Millennials as a working class and sizable consumer base. Yet we seem to have our head in the sand on perhaps the most important demographic shift in our life time, the long term rise in the global dependency rate. Higher dependency rates will dramatically constrain prosperity around the world.
The dependency rate measures the population of the aged population, and the number of working people required to support them. Author Fred Pearce points out that roughly half of the humans that have ever been over 65 years old are alive today (as a result of access to better health care)[i]. It is projected that by 2035, 1.1 billion people (13% of the world’s population) will be 65% or older. 13% may not seem like a lot, except when you think about the fact that it takes 1.5-2.0 working adults to fund every aging senior and their disproportionately higher health care costs.
In the U.S., birth rates are declining, which is partially offset by immigration. Our dependency rate is slightly below that of most industrialized nations. But perhaps the two countries that will be most impacted by such shifts are Japan and China, where the dependency rate will double by 2035.
Societal shifts will dramatically impact our ability to pay for our senior population. There is momentum in the U.S. to raise the retirement age, the most tenable political solution to the eventual insolvency of Social Security (which feels a lot like those street performers at Venice beach with 3 cups and one ball).
Medicare costs are expected to rise from $613 Billion in 2014 to $1 Trillion in the next 9 years[ii]. A Harvard University study found that between 1965 and 2005, the U.S. raised the retirement age by 6 months, during a time when male life expectancy increased by 9 years. In other words, proportionate to our life expectancy and ability to work, we are not working longer, we are working less.
Economists debate the economic impact of higher dependency rates. Amlan Roy of Credit Suisse predicts the drag on GNP growth to be .7% (pretty material when the total is around 3%).
Other countries around the world have linked retirement age to life expectancy, but in the U.S. we are lagging behind. The only reasonable explanation is that we do not have the political will to solve this problem. So the choice is ours, we can continue to stick our head in the sand, or we can look for real solutions to reverse the dependency gap.
Like it or not, we will need to continue to make difficult decisions about arresting health care inflation, and mitigating the cost of supporting seniors. We ought not to forget, that much of our prosperity is a result of their hard work, and ingenuity. They are worthy of such an effort, but we are probably going to need to work harder, smarter and longer to support them.
[i] Age Invaders The Economist April 26th, 2014
[ii] Centers for Medicare and Medicaid Services