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December 27, 1999
"Retirement Boom: In 2030, The Worker Pool Will Not Be Very Deep"
San Jose Mercury News
By Timothy Taylor
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THE BATTLE will be demography vs. technology. The winner will determine America's capacity for economic growth in the opening decades of the 21st century. The aging of the baby boom generation has generated countless headlines about how it may affect Social Security and Medicare. But this demographic trend also has powerful implications for the shape of the economy.

Between 2010 and 2030, the retirement of the boomers will be so rapid that it will almost entirely counterbalance the number of new workers entering the economy. As a result, the size of the working-age U.S. population from 20-64 is projected to rise by just 4 percent over these 20 years, according to the Social Security Administration.

A workforce that doesn't expand over two decades would be a radical change for the U.S. economy. The U.S. labor force will rise by about 31 percent from 1980 to 2000, after rising 53 percent from 1960 to 1980, and 25 percent from 1940 to 1960. These demographic forces could make the opening decades of the 21st century a splendid time to be an employee. The shortage of workers could lead employers to pay higher wages and to offer greater flexibility on hours and benefits.

But economic forces never guarantee an uncomplicated happy ending. The coming labor crunch will also create pressures for a number of other adjustments.

U.S. employers, starved for domestic employees, will have an increased incentive to draw on labor pools throughout the world. Of course, if the future jobs are overseas, then the wages and investment to support those jobs will be outside the U.S. economy, too.

The elderly will be encouraged to work longer, both by the carrots of higher wages and job flexibility, and also by the stick of raising the retirement age for receiving full Social Security and pension benefits. This trend may already be under way. The share of men aged 65 and over who are in the workforce rose from 16.3 percent in 1990 to 17.1 percent in 1997 -- and will keep climbing to 17.8 percent by 2006, according to the Bureau of Labor Statistics.

The labor shortage will also create political pressure from businesses to allow increased immigration, above and beyond the already historically high levels of the 1980s and 1990s.

These three forces -- increased use of foreign labor, later retirement, and greater immigration -- all tend to reduce the impact of a labor shortage, but none of them adds substantially to productivity and thus builds the pressure for higher wages. That is why a final adjustment, using technology to substitute for scarce labor, is so attractive. At least in theory, improved technology could allow higher productivity and economic growth even with a stable pool of labor.

We live at a time enamored of technology, and it is almost unfashionable to suggest there is any problem that technology cannot solve. But the ideas of new technology typically need investment capital to enter the corporeal world.

In the 1990s, the new information and communications technology has had such a substantial economic impact only because producer spending on the durable equipment which embodies this new technology has been rising at more than 10 percent per year.

However, the same demographic forces that will flatten out workforce growth will also push down America's level of savings. America's national savings rate is already low, and when the baby boom generation retires and starts drawing down its assets, the national savings rate is likely to drop lower still, thus shrinking the available pool of investment capital.

For example, private pension funds have been one of the major contributors to America's savings in the last few decades. However, with the retirement of the boomer generation, pension funds will turn into ''negative savers'' around 2020 -- that is, they will be selling off more in assets to pay benefits to retirees than they will be investing in new assets.

Government policies seem unlikely to add much to savings in the opening decades of the 21st century, either. The demands of Social Security and Medicare -- even assuming any politically plausible reform -- will turn any remaining government budget surpluses that have survived Washington's spenders and tax-cutters back into deficits by around 2020.

In the 1980s and 1990s, America has managed to have relatively high rates of investment with low rates of personal savings by drawing on foreign investment, especially from Europe and Japan. But demography will shut off this source of capital, too.

The aging of Japan and Europe is proceeding ahead of the United States; in most of Europe and Japan, the proportion of over-65s is already at the level that the United States will have in about 2020. The elderly in those countries are about to start drawing down their savings, too, not generating extra capital that can be funneled to the U.S. economy.

It's not obvious how the U.S. economy can overcome this future lack of savings and investment.

Perhaps if a program of mandatory personal savings accounts is enacted, as part of an overall reform of Social Security and Medicare, it will raise America's savings rate somewhat. But even that drastic an option may not be enough to counteract the reduced drain from the retirement tidal wave.

If the U.S. government were to raise its support of R&D dramatically, it could help to assure a continuous stream of new technological ideas. But if investment capital is scarce, then technology has a tendency to stay in the laboratory, or even just in the mind of the inventor, rather than being transformed into new processes and products.

The U.S. economy in the second and third decades of the 21st century appears set to embark on a dangerous-sounding experiment.

There has been a lot of casual commentary in the last few years about how we are entering the age of information, skilled workers and new technology. The U.S. economy is on course to provide a dramatic test case of whether these forces alone, when combined with a perpetual shortage of domestic workers and investment capital, will prove sufficient to power a country's economic growth.

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