Aging Populations Don’t Need to Mean Lower Living Standards
The bright minds at McKinsey & Co. are arguing that declining birth rates mean that people need to work more hours for more years and maybe give up retirement altogether. No thanks.
Expect economic elites to argue that maintaining economic growth amid falling birth rates will require austerity for the working class. (Getty Images)
In a recent article, the New York Times once again sounded the alarm about a supposed crisis of underpopulation in the United States. Warning about the potential consequences of recent demographic developments, Lydia Polgreen writes:
Country after country in the wealthy world is facing a top-heavy future, with millions of retirees and far too few workers to keep their economies and societies afloat. In the not-so-distant future, many countries will have too few people to sustain their current standard of living.
But this conclusion is far too hasty. What falling fertility rates (combined with a lack of sufficient in-migration) will do over the long term is put downward pressure on the economic growth rate as a result of the declining growth of the number of workers in the economy. That is quite a different thing than lowering the average standard of living. We can reasonably expect increases in labor productivity to outpace the growth of the ratio of nonworkers to workers, obviating the concern that an avalanche of retirees will sink general living standards. And it is plausible that workers could even see their living standards increase — especially if labor increases its income share relative to capital.
Polgreen here is reviving what, apparently, is becoming a common bait-and-switch for those wanting to scare readers into supporting attacks on their own economic interests. What is really motivating elite concerns about lower population growth rates, however, is the prospect of the threat to their own pocketbooks.
Work Until You Die
The justification for Polgreen’s judgment is a report she links to from the McKinsey Global Institute released earlier this year, Dependency and depopulation? Confronting the consequences of a new demographic reality. The report’s analysis has been received sympathetically by the mainstream media, including in another entry in the seemingly endless parade of profiles of the pronatalist Collins family. McKinsey is an appropriate authority to appeal to for anyone looking to argue for depressing workers’ living standards, given its history of fixing bread prices, facilitating the opioid epidemic, and other skulduggery. Indeed, its entire modus operandi has been characterized by one former employee as “increasing investors’ share of profits by reducing labor’s share.”
True to form, the authors of the McKinsey report counsel sacrifices on the part of workers for the benefit of business. The twist this time, however, is that the demographic trend of continued below-replacement fertility rates provides the excuse for attacks on living standards. The report tells us that “the trajectory of the demographic shift will require society to rethink existing systems for work and retirement in ways that may compel a change in our social contract — no easy feat.”
One of the report’s recommendations is that countries must hike their “labor intensity” — which McKinsey defines as “weekly hours worked per person” — to compensate for increased dependency ratios (that is, the ratio of youth and elderly to the working-age population, a purely demographic measure that approximates the ratio of nonworkers to workers in the economy). Essentially, McKinsey is advocating extending working hours for the average worker in order to boost economic growth rates given lower population growth.
But the McKinsey report has other recommendations too. Aging populations mean that, other things being equal, retirees will make up a bigger share of the overall populace. For McKinsey, this is a problem to be solved. In their words, this means “creatively managing an older workforce to sustain productivity.” Striking a philosophical note, the authors say that “the concept of retirement has blurred and may become an outdated construct altogether with societal participation later in life.” (An example of measures the authors have in mind to dragoon would-be retirees into the workforce: “CVS, the drugstore chain, is tapping some of its older customers to be employees through a program called Talent Is Ageless.”)
For those who might frustrate McKinsey’s expectations by continuing to actually retire, their consultants have ideas for them too. Future retirees might decrease the amount they could potentially withdraw from their countries’ pension systems by retiring later, or not having a guaranteed pension in the first place: “Countries across the developed world have opened conversations on changes ranging from increasing the statutory retirement age to switching to defined-contribution systems, in which retirement benefits are calculated based on the money paid into the program.”
There is much else in the report, and not all of the solutions the McKinsey authors suggest are straightforward attacks on worker welfare. Other recommendations include commonplace suggestions to boost GDP in response to declining fertility rates, such as reversing the fall in fertility rates, attracting more migrants, and increasing labor productivity through investment.
Also, the United States is in a less dire fiscal position than other countries that the report analyzes. The United States has a higher per capita income, labor productivity, and fertility rate (and, sadly, a lower life expectancy, at sixty-five) than the OECD average and remains an attractive destination for immigrants. Furthermore, the United States has some relatively low-hanging fruit it could pick to lower retirement costs, which have already been harvested by other countries with more developed welfare states; eliminating the waste that the private health care system incurs is one example.
Importantly, though, the McKinsey report represents a genre of argument that will likely become more frequent in the years to come as fertility rates continue their plunge worldwide: maintaining economic growth in the context of a rising share of elderly to working-age people inevitably requires greater austerity for the working class. The Left’s response should be to reject the fatalistic framing of “demographics is destiny” and reintroduce economics and politics into the conversation.
Ultimately, workers’ living standards cannot be understood currently or accurately projected into the future with reference to demography alone. Their trajectory depends on a number of other economic factors, such as the wage level, labor productivity, and workforce participation. Neglecting these components will lead to erroneously dour forecasts of workers’ living standards. Similarly, failing to recognize the impact of politics on these economic factors leads to bad arguments. Whether workers see their living standards improve or decline in coming decades will depend, in large part, on how much of the social product they can wrest for themselves.