from the Richmond Fed
America, like many industrialized countries, is aging. The Census Bureau projects that by 2030, over 20 percent of U.S. residents will be 65 or older, up from 13 percent in 2010 and less than 10 percent in 1970. For elder-law attorneys and hearing-aid companies, the economic implications of this trend are more or less obvious. For fiscal policymakers, especially with regard to programs like Social Security and Medicare, the implications are also obvious – although the precise extent of the effect is up for debate. But what are the trend's implications for monetary policy?
Despite the certainty of the oncoming demographic change, little is known about how it is likely to affect the Fed's policy tools. Some policymakers and observers have expressed concern, however, that the Fed's ability to stimulate the economy may decline for demographic reasons, if it hasn't already done so. For example, New York Fed President William Dudley suggested in a 2012 speech that “demographic factors have played a role in restraining the recovery,” in part because spending by older Americans is “less likely to be easily stimulated by monetary policy.”
If the contentions of some economists are correct, the aging trend will affect asset markets in ways that will influence how the Fed conducts monetary policy, perhaps forcing the Fed to make bigger interest rate changes for the same amount of stimulus or tightening it wishes to apply to the economy. It could also lead the Fed to resort more frequently to unconventional tools such as massive purchases of assets — the so-called “quantitative easing” in which the the Fed engaged after the Great Recession.
An Aging America
America's aging trend (see chart) reflects several distinct causes. The most famous of them, the baby boom, is the jump in fertility that took place following World War II and continued for 18 years. Birth rates during this period ranged from 24 to 26.5 per 1,000 people in the population, compared with 18 to 19 per 1,000 people during the Great Depression years leading up to the war. The term “baby boomer” commonly refers to people born in the United States from 1946 to 1964, when birth rates finally fell to their pre-boom levels.
The baby boom wasn't America's first postwar birth boom — a brief, shallow one took place during the two years following World War I — nor was it a historical peak in U.S. birth rates. What has made it a powerful driver of today's aging trend is partly the sheer number of baby boomers who were born in its long duration, some 72.5 million in all.
Another reason for the aging trend is the pattern of U.S. birth rates in the 50 years since the end of the baby boom. During that time, birth rates never returned to even the lowest levels of the baby-boom years. They have hovered around 15 per 1,000 people since the early 1970s, declining further with the 2007-2009 recession. In 2012, the latest year for which data is available, the rate was down to 12.6 per 1,000.
Combined with the declines in birth rates are the increases in our life expectancies, from 47.3 years in 1900 to 68.4 years in 1930 and 78.2 years in 2010.
While America is aging, it is far from alone in doing so. The other large developed countries are generally older. In 2012, the populations of Germany, Italy, and Japan were at least one-fifth seniors aged 65 or older, a level that the United States is not expected to reach for decades.
To be sure, population forecasting is not foolproof. John Maynard Keynes asserted in a 1937 speech before the Eugenics Society that Britain would soon face “a stationary or declining level” of population — a prediction he made on the eve of that country's wartime and postwar baby booms. In the case of the present-day United States, one of the variables that will affect the age structure of the population is the course of future immigration. Still, given the size of the baby-boomer pig moving through America's demographic python, there is little debate that America will be getting older.
