Alan Greenspan on the Economic Implications of Population Aging

At the 2004 annual symposium of central bank leaders sponsored by the Federal Reserve Bank of Kansas City at Jackson Hole, Wyoming, Alan Greenspan, Chairman of the US Federal Reserve Board, devoted his opening remarks on 27 August to a discussion of the economic implications of population aging. The full text of his remarks is reproduced below. Greenspan's high prestige and great influence on US economic policy lend special interest to his views on this much-discussed subject (see also the next Documents item in this issue). He outlines the coming demographic shift in the United States in language that is characteristically cautious and qualified. (The elderly dependency ratio will “almost certainly” rise as the baby boom generation retires, Greenspan says, although elsewhere he terms the process, more accurately, inexorable.) The main factor responsible for population aging he identifies as the decline of fertility. Immigration is an antidote, but, to be effective, its size would have to be much larger than is envisaged in current projections. Greenspan's assessment of the economic consequences of the changing age structure highlights the prospect of a deteriorating fiscal situation in the United States: chronic deficits in the Social Security program over the long haul, assuming that existing commitments for benefits per retiree are met, and even greater difficulties for the health care system for the elderly—Medicare—in which the effects of increasing numbers in old age are amplified by advances in medical technology and the bias inherent in the current system of subsidized third-party payments. The sober outline of policy choices imposed by population aging—difficult in the United States, but less so, Greenspan notes, than in Europe and Japan—underlies the need for counteracting the declining growth of the population of labor force age through greater labor force participation and later retirement. Beyond that, growth of output per worker can provide the key “that would enable future retirees to maintain their expected standard of living without unduly burdening future workers.” This requires continuation of policies that enhance productivity, such as deregulation and globalization, and greater investment. In turn, the latter presupposes greater domestic saving, both personal and by the government, as the United States cannot “continue indefinitely to borrow saving from abroad.” Demographic aging requires a new balance between workers and retirees. Curbing benefits once bestowed is difficult: only benefits that can be delivered should be promised. Public programs should be recalibrated, providing incentives for individuals to adjust to the inevitable consequences of an aging society.