I often hear from decision-makers that it’s hard to prepare for future developments if we don’t have high confidence they will happen. I’ve warned of the growing risk of conflict with China or Russia, but even I don’t believe an open conflict is necessarily inevitable. But demography is an area where there is a lot of inevitability. And the picture for the United States and other advanced economies, such as Europe and Japan isn’t pretty. We know the boomer generation has entered the retirement years. We also know that since 1990, lifespans have increased more than 2.5 years per decade on average and sometimes more significantly in specific cases: Germans’ lifespans have increased 3.4 years per decade in the same 1990–2010 period.
All of this spells major fiscal trouble and it is very predictable. With rapidly aging populations, health care and pension costs will soar. In the fifty years between 1960 and 2010, public pension expenditure as a percent of GDP has doubled and will grow another 3 percent by 2035.  In the US case, a big problem is healthcare costs which already consume almost 18 percent of GDP, a far higher proportion than the 10 percent for most other industrialized countries. This share will only increase as numbers of people aged 65 or older increases.
Rapid aging is also its own double whammy. Not only we will see an explosion in social security and health care spending, but the proportion in the labor force also declines which will lead to lower economic growth unless we boost productivity. According to McKinsey Global Institute, “half of the global economic growth enjoyed over the past fifty years can be attributed to increases in the labor force.” Productivity, according their calculations, would have to increase by 22 percent if we were to maintain per capita income group. The problem for high income Western countries is that they are aging faster than the developing world. China will also encounter rapid aging, but even in 2030 the United States will have a higher proportion — over 20 percent — of its population in the senior years than China — 17.2 percent. Currently 10 percent of China’s population is over 65 versus 15 percent for the United States.
The fact that nobody is talking about these demographic changes doesn’t mean we won’t soon have to deal with them. The Congressional Budget’s most recent (July 2014) Long Term Budget Outlook warned that the United States will “face steadily increasing federal budget deficits and debt over the next 30 years…Federal debt held by the public, which was equal to 39 percent of gross domestic product (GDP) at the end of fiscal year 2008, has already risen to 75 percent of GDP in the wake of a financial crisis and a recession.” Without structural changes to taxes and spending, debt will rise to “86 percent of GDP in 2026 and to 141 percent in 2046 — exceeding the historical peak of 106 percent that occurred just after World War II.”
It will be hard to change this trajectory without increasing taxes or going back on promises that the USG has made to retirees and those headed into retirement. With almost daily reports of numerous public and private sector pension schemes going insolvent, social security will be more than ever vital for many of them. At the same time, squeezing other USG-funded programs such as defense and R&D is not any way of ensuring the country’s long term future. This is a clear cut case for tackling the problem sooner rather than later. Social Security is already running a deficit and will be insolvent in 2035 — waiting will only compound the problem. Of course, the needed reforms — such as raising retirement ages or lessening benefits for well-off retirees — would be politically and socially painful.
Ditto on healthcare. To be economically competitive, the United States needs to bring down the share of its healthcare costs to be more in line with other industrialized countries. But, as we’ve seen as the controversy surrounding Obamacare, any tampering with healthcare is politically dangerous.
Usually crises are opportunity for taking drastic actions. The 2008 financial crisis could have been that moment. The Obama Presidency did implement healthcare reform, but it isn’t likely to cut down dramatically the likely scale of US healthcare spending in the future. Both political parties largely ducked the issue of long term budget deficits. The recovery and winding down of the huge budget deficits during the Great Recession eased off the pressure and politicians took the easy out of kicking the problem down the road.
Politics aside, if we don’t tackle these issues, we risk our long term national security and that’s a certainty. If there ever was a need for leadership, it is on these thorny demographic issues. Too many people are vested in the current status quo even though that is unsustainable.
 See recently published Atlantic Council report, “Reducing the Risk from Rapid Demographic Change,” September, 2016, http://www.atlanticcouncil.org/events/upcoming-events/detail/reducing-the-risks-from-rapid-demographic-change.
 James Manyika, Jaana Remes, Richard Dobbs, “The Productivity Challenge of an Aging Workforce, Harvard Business Review, January 20, 2015, http://wwww.mckinsey.com/mgi/overviw/in-the-news/the-productivity-challenge-of-an-aging-global-workforce.
Congressional Budget Office, The 2016 Long-Term Budget Outlook, July 2016, https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51580-LTBO-2.pdf.
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