Thursday, October 05, 2006

Ben Bernanke and the Coming Demographic Transition

by Edward Hugh

Ben Bernanke's speech yesterday should prove interesting for all readers of Demography Matters. The speech is interesting not so much for his views on the US social security system as such, but for the way he conceptualises the problem. This IMHO is a huge step forward. We are in the midst of an ongoing demographic transition. Here are some extracts:

The Coming Demographic Transition: Will We Treat Future Generations Fairly?

In coming decades, many forces will shape our economy and our society, but in all likelihood no single factor will have as pervasive an effect as the aging of our population.

This coming demographic transition is the result both of the reduction in fertility that followed the post-World War II baby boom and of ongoing increases in life expectancy. Although demographers expect U.S. fertility rates to remain close to current levels for the foreseeable future, life expectancy is projected to continue rising. As a consequence, the anticipated increase in the share of the population aged sixty-five or older is not simply the result of the retirement of the baby boomers; the "pig in a python" image often used to describe the effects of that generation on U.S. demographics is misleading. Instead, over the next few decades the U.S. population is expected to become progressively older and remain so, even as the baby-boom generation passes from the scene. As you may know, population aging is also occurring in many other countries. Indeed, many of these countries are further along than the United States in this process and have already begun to experience more fully some of its social and economic implications.


...........many observers have noted the difficult choices that aging will create for fiscal policy makers in the years to come, and I will briefly note some of those budgetary issues today. But the implications of demographic change can also be viewed from a broader economic perspective. As I will discuss, the broader perspective shows clearly that adequate preparation for the coming demographic transition may well involve significant adjustments in our patterns of consumption, work effort, and saving. Ultimately, the extent of these adjustments depends on how we choose--either explicitly or implicitly--to distribute the economic burdens of the aging of our population across generations. Inherent in that choice are questions of intergenerational equity and economic efficiency, questions that are difficult to answer definitively but are nevertheless among the most critical that we face as a nation.

Indeed, framing the issue in generational terms highlights the fact that the economic implications of the coming demographic transition go well beyond standard considerations of fiscal policy and government finance, important as those are. For reasons that I will explain in a moment, the aging of the population is likely to lead to lower average living standards than those that would have been experienced without this demographic change. How that burden of lower living standards is divided between the present and the future has important implications for both intergenerational fairness and economic efficiency.

Indeed, framing the issue in generational terms highlights the fact that the economic implications of the coming demographic transition go well beyond standard considerations of fiscal policy and government finance, important as those are. For reasons that I will explain in a moment, the aging of the population is likely to lead to lower average living standards than those that would have been experienced without this demographic change. How that burden of lower living standards is divided between the present and the future has important implications for both intergenerational fairness and economic efficiency.


Of course, it is not hard to see that Bernanke still casts the problem in terms of the traditional compositional (dependency ratio) impact, without getting into either the ageing and productivity, or the life cycle saving and consumption issues. Nonetheless this speech still constitutes a huge step forward in the battle to get all this onto the international policy agenda.

4 comments:

Nandan Desai said...

- I'm not entirely sure this speech will make a significant impact on putting the demographic issue on the US or international agenda (to the extent that it's not there already)

- Question for the group: With regard to the baby boomers in the US, what specific moral obligation does the rest of society have to ensure a comfortable retirement for them?

- The other problem in the US is that old people (vaguely defined) have outsize political representation because they vote consistently, whereas young people in general, care much less for the democratic process

S.M. Stirling said...

Well, as the saying goes, if you have the vote but don't use it you forfeit any right to complain at the results.

In any case, as long as fertility remains at replacement levels or above, aging is not likely to become a really major problem.

Average lifespans are increasing, but not potential lifespan.

What's happening is that more people are living up to their potential maximum span -- mortality is being concentrated among those 75 and up. Some people always lasted that long; now rather more do.

This creates financial and other problems, but not insuperable ones if the younger age-cohorts are growing in size.

Creditworthy said...

I don't realize the way this demographic problem could be solved. The main point is to avoid of the mental population ageing. I mean old people tend to hold their ground and hamper progress.

Anonymous said...

I am writing this in November 2012 just after President Obama won the relection. It seems to me that he was mostly elected by the younger generation(s). For the next four years, the ball will be partly in their court. Fair and balanced? I hope so.