Economy to struggle as baby boomers retire

The U.S. economy is starting to experience slower growth and other challenges as baby boom workers age and move into retirement, economists say.

The pool of native workers available to fuel economic activity and growth is rising more slowly and, within the next decade, will start to shrink as baby boomers in their 50s and 60s retire and are not replaced by young workers entering the labor force.

The more sluggish growth in the labor force since 2000 already has prompted Federal Reserve Chairman Ben S. Bernanke and other economists to warn that the economy cannot grow as fast as in the late 1990s, when 4 percent annual growth and 300,000 new jobs a month was the norm. Average growth in today’s economy has dropped to between 2.5 percent and 3 percent annually and about 150,000 new jobs a month, they estimate.

The loss of an important natural source of economic growth — the steady increase in population that has been present in the U.S. from the frontier days to its rise as an industrial power in the 20th century — is a first for the nation and presents some new issues and problems for businesses and the government, said Thomas Stinson, a Minnesota state economist.

“It is not normal for a society to age,” he said. He expects the change to be “dramatic” and even “sudden” in the next four years as a sharp increase in retirements starts to impact the economy in Minnesota, where experience mirrors the nationwide trend.

The tide of aging workers and retirees is not just an American phenomenon. It is sweeping the globe and promises to be a challenge even in fast-growing economies like China in a few decades. The primary reasons the population is aging are that people have fewer children and live longer due to better health care.

The populations of Europe and Japan are getting older even more rapidly than the U.S., and those countries face more immediate problems in supporting massive retirements and maintaining economic growth. Japan’s growth and population peaked in 1990 and have been mostly stagnant since then.

Harry S. Dent Jr., president of the H.S. Dent Foundation, an investment research group, thinks the U.S. is not far behind, with unsettling consequences for the financial markets.

“A major economic slowdown will occur in North America and Europe from 2010 into 2020-2024 that will be marked by a series of dramatic stock crashes” and declining rates of consumer spending, he predicted.

Although Asia and other developing areas will continue to grow rapidly and buoy the world economy for several more decades, they too will reach a peak within this century due to aging populations, he said, calling it the “greatest demographic and economic shift in modern times.”

Immigrants play role

Unlike Europe and Japan, U.S. growth has been aided by a strong flow of immigrants, who currently contribute about half the growth in the labor force. Their influence is expected to increase.

Mr. Dent said one remedy for the aging problem would be to replace the current hodgepodge of legal and illegal migration with an “intelligent” system that focuses on attracting immigrants with high education and skill levels that are needed in the economy. The recently defeated Senate immigration bill took such an approach.

“The new consumers we will need to offset the coming economic contraction are alive today and living beyond our borders. If our nation were to embrace an immigration policy that focused on attracting specific types of legal immigrants, we could likely address our problem without increasing the total number of immigrants coming into our country each year,” he said.

But he conceded that the current backlash against illegal aliens makes it unlikely such reforms will be enacted in time to significantly help the economy.

“The current state of world affairs and the political climate it has created make it doubtful that Americans are willing to accept that the solutions to our future domestic problems are dependent on the skills, talents and productivity of foreigners.”

Mr. Bernanke noted recently that immigrants on average are younger than native Americans, are more inclined to work and have more children per family, providing an important prop to the economy by counteracting the slower growth and heavy pension burdens caused by an aging native work force.

The Fed chairman has urged Congress to ensure a steady and reliable flow of immigrant workers that the economy needs. But he estimated that immigration will have to increase to about 3.5 million a year from 1 million today to overcome all the problems caused by aging — an unlikely prospect.

“Immigrants who come and contribute to the economy and who are younger will be of some assistance in offsetting this demographic transition,” he said, “but they’re only going to be part of the story and we’re going to have to address these broader issues in any case.”

In the absence of a major new wave of immigrants, fewer U.S. workers will be called upon to support a growing number of retirees and will have to be even more productive than previous generations to keep the economy humming anywhere close to its average 3 percent growth rate in modern times, Mr. Stinson said.

“Productivity will need to increase. … Everyone’s talents must be fully used if we are to continue to be successful,” he said. “If it doesn’t, we will not maintain our current living standard.”

Productivity is key

Productivity — or a worker’s output per hour — has been growing strongly in the last decade thanks to technological improvements like the computer, Internet and digital applications that enable workers to do more work with the same amount of effort they made in past years, for example, using typewriters.

Maintaining strong productivity requires robust investment by businesses in new technologies as well as large flows of capital to finance the investments. Some economists question whether enough investment funds will be available as the senior population spends down its savings — a key source of capital. But others are confident that the U.S. will continue to benefit from the strong flows of investment from abroad that the country has enjoyed in recent years.

Mr. Stinson is more concerned about possible shortages of the highly educated and skilled workers needed to create and man the technologies of the future. Employers already are reporting shortages of skilled workers in areas dominated by baby boom workers today, like nuclear, aerospace and petroleum engineering.

Workers in the future will need at least college educations to land the best jobs and fuel technological advances, but high school dropout rates today are elevated at nearly 10 percent and rising. Dropout rates among minorities and migrants, which are projected to make up a greater share of the work force, are substantially higher than those of the shrinking white population.

“We have a serious problem. We’re falling behind in our ability to develop human capital” through education, said Arthur Rolnick, senior vice president of the Federal Reserve Bank of Minneapolis. He noted that workers with college educations earn 100 percent more on average than high-school dropouts, and the pay-off to education has been growing rapidly, but that has not sufficed to keep all youths in school.

“If we have kids that drop out of high school, that’s a major crisis in our economy,” he said.

To deter potential dropouts, he and Mr. Bernanke said educators must get started before children even enter school to help them develop the right attitudes and aptitudes.

“We’re way underinvesting in early childhood education,” Mr. Rolnick said, noting that the federal “Head Start” program, which provides assistance to poor pre-schoolers has been a notable success. “There is a very high return to a public program like that.”

Enticing seniors to work

Another area that businesses and government will have to gear up for is reversing policies from previous eras that encouraged the most skilled and experienced workers to leave the work force through mandatory retirement and early retirement programs, Mr. Stinson said.

“Successful companies are going to learn how to retain individuals” who have desirable talents, he said, but who otherwise might retire under company programs or as they become eligible for Social Security and Medicare benefits at ages 62 to 67. That means employers will have to raise wages and offer benefits and other enticements to keep the most productive workers on staff.

Some employers are forging the way. Most universities and government offices do not force workers to retire unless they have safety-related jobs such as firefighting and policing.

But mandatory retirement is still common in corporate America, according to the Longevity Alliance, a group that provides financial services to seniors. General Motors and Intel, for example, force their workers out at 65, while Ford and Hewlett-Packard allow their employees to work another five or so years before sending them packing.

Many baby boomers may be counting on working past retirement age because they haven’t prepared adequately for retirement. But they shouldn’t “underestimate the pervasiveness of age discrimination in the workplace,” said Laura Rossman, publisher of the Alliance’s Momentum newsletter.

“Most employers aren’t looking to hire folks in their 60s and 70s. Actually, that’s the age when people often get laid off,” she said.

Richard Berner, chief U.S. economist with Morgan Stanley, expects many baby boomers will try to prolong their careers out of necessity or love of the job, but he said that will not cure the demographic crunch.

Recent studies make it “clear that only heroic increases in geezer labor force participation will offset population aging,” he said. He added that private corporations will continue to take their cue from the retirement ages set by Social Security and Medicare, so government policy in those areas could be critical in maintaining or changing private employment practices.

Besides possibly raising the retirement age to reflect the longer life spans and better health of today’s seniors, many economists like University of California professor Ronald D. Lee, author of a book on the economics of aging, advocate reforms in pension programs like Social Security that rely on employment taxes for funding. They want to switch to private retirement savings accounts that are funded by workers themselves to ease the potentially onerous tax burden on the smaller work force of the future.

Such proposals have gone nowhere recently in Congress. Mr. Lee said the move not only would prevent the need for stultifying tax increases on future workers, but also would boost the national savings rate and increase the amount of capital available for productivity-spurring investments needed to maintain living standards.

The aging of the population “does not have to result in an economic downturn” if the retirement system is restructured that way, he said.