The Aging Population in the United States

Managerial Economics ORG 342 The Aging Population in the United States and its Effect on our Economy July 20, 2010 Aging Population 1 The population in the United States is aging at an unprecedented pace. For the first time in history, seventy percent of everyone who has ever lived is alive today (Isidro, 2009). The aging population and their imminent retirement will place an even greater strain on the countrys financial resources. The baby boomers; people born between 1946 and 1964 have influenced our economy by their sheer number. As this age group matures and enters their retirement years, an economic shift is inevitable.

Not only will changes be seen in government programs such as social security, Medicare, and Medicaid, but consumer spending will also see a dramatic transformation. Over the next thirty years, the United States will see the largest demographic change in history. 77 million baby boomers will cease to work and pay payroll taxes (Fehr, Jokisch, 2005). The drain on government social programs will be severe as the baby boomers retire and collect benefits. The gradual aging of the population will bring demographic changes not seen since the end of World War II.

The increase in the number of people over age 65 strongly influences social, conomical, medical, and personal situations. This phenomenon of aging will place extraordinary pressures on the economic resources necessary to sustain the population’s standard of living. In the Aging Population 2 United States, individuals over the age of 65 constituted 4 percent of the American population in the year 1900. In the year 1972, 10 percent of the population was over the age of 65. Estimates for the year 2050 are as high as 22 percent (U. S. Census Bureau, 2004).

In the next 10 to 15 years, the first of the baby boomers will begin to retire. This will be a large generational shift from the young to the old. The United States population boom following World War II, did not continue with the resulting generation. This generation born as baby boomers produced much fewer children. This has resulted in the younger workforce shrinking as the aging population is increasing. The number of older persons supported by social security is growing while the number of younger employed persons paying into the retirement system is declining.

This dependency ratio in the United States is currently at 20 percent. According to the World Bank, the dependency ratio will be close to 46 percent by the year 2050. The structure of the economy and consumption will experience a significant change. Many economists agree that people work and save money when they are young and live off the proceeds when they retire. With this formula, wealth different consumption and saving patterns at different stages in their lives. With the change in the age structure, consumption patterns of the population will also Aging Population 3 change.

The needs of older people are very different from the needs of middle aged and younger people and have less need for borrowing money (Isidro, 2009). Paying the elderly their promised benefits will require large tax increases. The burden on the younger workforce will be substantial. One study conducted by the National Bureau of Economic Research shows that the payroll tax will need to increase from 14 percent to 23 percent over the next 30 years, while the average income tax will rise from 10 to 14 percent. The total tax on wages will rise from 24 percent to 40 percent.

Higher taxes mean lower after-tax income for workers. The younger work force will have less disposable income which results in less saving; less savings means less capital formation; less capital formation means lower labor productivity; and lower roductivity means lower real wages (Fehr & Jokisch, 2005). The younger work force will experience a 25 percent reduction in take home pay. According to National Institution of Pension Administration data, future public spending will be profoundly affected by the aging population.

Major government transfer programs such as Social Security, Medicare, and Medicaid disproportionately benefit the elderly, while expenditures on public education disproportionately benefit the young. With the trend of our population entering the older age group, even more funds will be allocated to the elderly. With the younger generation being fewer in number, the government consumption in public education Aging Population 4 will be reduced, somewhat off setting the rising expenses for the older age group.

Unfortunately the decrease in the number of school age children will be much less than the increasing numbers of people reaching retirement age, so the transfer of funds may be insignificant. In 1986, The Center for Mature Consumer Studies was established for the purpose of understanding the consumption behavior of the aging population. Its mission is to generate and disseminate information that can help rganizations improve the efficiency of their marketing activities and enhance the well being of older adults (Brock, 2010).

Once portrayed as unhealthy and unproductive, this generation is now being seen as contributors and a viable consumer group. This large group of people has determined the size and age composition of the labor force for over 30 years. As this group ages, the age of the labor force increases; this will have an impact on the economy. The number of people exiting the labor force due to death, disability or retirement will rise in unprecedented numbers. By congressional mandate, beginning in the year 2000, the normal retirement age for collecting a full Social Security pension started increasing by gradual increments.

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