Concerns over our economic future dominate the news. Discussions about what to do with Medicare, Social Security, Medicaid, the national debt, long-run budget deficits and similar issues have taken hold of our state and national discourse.
What is this about -- and why is it happening now?
What has happened is that the first wave of the very large baby boom generation turned 62 in 2008 and became eligible for Social Security old-age pensions in exactly the same month that the Great Recession began. Those same folks began to turn 65 this past January and became eligible for Medicare.
The United States has entered the Age of Entitlements. Few forecasted the Great Recession, but we have long known about the inevitable aging of our society and the implications of 2008 and 2011.
This is just the beginning. Over the next 10 years, we will add as many people age 65 and older as we did in the past four decades combined. By 2020, we will have as many people age 65 and older as we will have children in K-12 education. In the following decade, the 2020s, we will add even more older people.
In this, Minnesota is not exceptional. We are essentially the national average in age structure. Our state and our nation, always known in the past as young and risk-taking, are growing old.
These are not normal times.
People age, but nations do not. Not, at least, until recently, when many countries around the world have begun to grow older, including all of Europe and much of Asia. This happens when fertility rates fall below 2.1 children per woman -- and falling fertility rates have spread over much of the world. According to CIA estimates for 2011, 105 nations have fertility rates below this level, and many others are seeing declining rates.
Among the largest economies of the world, the U.S. fertility rate is 2.06, followed by China at 1.54, Germany at 1.41 and Japan at 1.21. Our neighbor countries of Mexico and Canada have rates of 2.29 and 1.58, respectively. Mexico's rate has fallen from 4.7 in 1980 to 2.7 in 2000 and to 2.29 in 2011. These are dramatic declines.
National policy discussions are focusing on the long-run implications of this aging -- what we can do now to prepare for the next two or three decades. The shorter run of the next five to 10 years has been largely ignored. But during these next few years, we will experience some dramatic changes that we need to prepare for and, perhaps, take advantage of.Retirement boom
We are poised on the eve of a dramatic increase in the number of people retiring from the workforce. The change will not be gradual. The recession led to a jump in the number of retirements as measured by the number of new retiree awards for Social Security old-age pensions.
Calendar year 2008 saw a nearly 12 percent increase over 2007, and 2009 saw a 34 percent increase over 2007, as older workers experiencing changes in their employment situation retired, perhaps earlier than they had planned. Through the first seven months of 2011, new retiree awards for Social Security pensions were 21 percent ahead of the 2007 level.
While the impact of the recession has perhaps been the largest contributor to growth in new awards for the past three years, aging of the workforce will soon exert an ever greater influence. Retirements will increase substantially over the next two years, perhaps starting this fall.
This largely parallels the birth records of 65 years ago. Next year, forecasts show the number of retirees increasing about 6 percent, with an 8 percent increase in 2013, followed by rapid growth in the range of 3 percent to 4 percent per year over the next 15 years.
While the recession has induced retirements from occupations heavily affected by the business cycle, future retirements will come from almost all industries and all occupations, including some where qualified workers are already in short supply, such as doctors and engineers.
At the same time we see this increase in retirees, the number of high school graduates will decline. Minnesota high school graduates peaked in 2008, and will decline to mid-decade and then rise gradually -- not returning to the 2008 level until about 2022.
More retirees with fewer young people to take their place means that labor-force growth will slow to very low levels by the end of this decade.
This projection is based on the potential supply of people to the workforce, and much will depend on what happens to the demand for labor. However, these projections do take into account the likelihood that workers will delay retirement and that immigration will continue at current levels.
A slowing rate of growth in the labor force has implications, not only for funding programs such as Social Security and Medicare, but also for the opportunities available to younger workers, and for economic growth.The productivity challenge
In the short run, many factors affect economic growth. But in the long run, there are only two ways to grow an economy. One is to increase the number of people making stuff and services. The other is to increase the amount of stuff and services each person makes. The number of people making stuff and services is the size of the workforce. The amount of stuff and services each person makes is the productivity of the average worker.
The growth of our workforce, even under optimistic assumptions, will slow dramatically this decade and next. This future is essentially locked in. What's more, the number of hours worked will grow even more slowly as increasing numbers of older workers work less than full time.
This means that the rate of increase in per-worker productivity must increase substantially if we are to maintain even a modest rate of economic growth. If we, as a nation, are to maintain our average 1990 to 2008 economic growth rate of 2.8 percent in this next decade -- a modest rate at best -- we will need per-worker productivity increases greater than in any decade since 1960.
This is a tall order.
How can we do this? Apparently, working longer hours or working more frantically or multitasking are not the answers. Much research has indicated that these practices may actually lower per-worker productivity. Of course, many think the answer to the productivity challenge is faster, better machines, and this will be part of the solution. But simply making things cheaper is not the only way to increase productivity.
Improving quality (making things better) is also a solution, and one for which Minnesota has been well-known. If you want the best implantable medical device (and who wants less than the very best for this purpose) you will likely select a product made in Minnesota.
Another route to higher productivity is to make better things, also called innovation. The pressure will be on for companies, organizations and governments to innovate their processes and products. The economies that succeed in substantially increasing the rate at which they make things cheaper, make things better and make better things will succeed.
Of course, to make things cheaper, make things better and make better things requires talent. The economies that fully develop their own talent and attract talent from other economies will be successful. Those that don't, won't.New skills wanted
So, what does this mean for young people entering the workplace? With all these retirees, won't the opportunities for young people improve?
Perhaps starting next year, the number of replacement positions will exceed the number of new job openings. The question is, will employers fill those positions on a one-for-one basis?
The pressure on employers will be to increase productivity. As they replace workers, they will be looking for candidates with skills that can help them move into the 2020s.
The old world of fixed and unchanging procedures, of following orders, and of learning one or two technical processes that remain fixed for years is fading. New workers will be required to have more math, more ease with rapidly changing electronics, more ability to quickly adapt, more independent judgment.
Because many of our education and training systems have not kept up with the rapidly changing skills and abilities market, a mismatch between the skills employers are looking for and those available from job seekers appears to be growing.
If employers can't find the people they are looking for locally, they have options. They can import workers from other economies, or they can export jobs to other economies, or they can replace jobs with machines.
The McKinsey Global Institute divides jobs worldwide into three categories. The first is "transformational." These are jobs that transform something into something else -- wood into furniture. Many of these involve repetitive processes and are being replaced worldwide by machines.
The second type of job is "transactional," such as retail clerk. These jobs are often easily scripted and are being replaced by electronics. Think about the growing number of stores with check-out-yourself lines.
That leaves a third type of job -- the "tacit jobs." These involve custom work or independent judgment, and are increasing worldwide. These jobs require a different set of skills, focused on decisionmaking, and specialized skills that are not repetitive or easily scripted.
Why should all this concern the about-to-retire baby boomer? Isn't this someone else's problem?
Here is why: Pension funds, Social Security, Medicare, Medicaid, individual retirement accounts and other financial entities depend on economic growth to fulfill past promises, which were often made based on the assumption of historical levels of economic growth. This is the issue that faces much of Europe. There, promises have been made that may be difficult to keep, due to lower-than-anticipated economic growth.
Europe is older than we are, so we have a bit of advanced warning. While we probably need to examine the promises we have made and consider, perhaps, better ways of fulfilling them, we also need to increase economic growth and per-worker productivity.
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Tom Gillaspy is Minnesota's state demographer.