Overview
In 2023, the U.S. birth rate declined to its lowest level in history, continuing a trend of falling fertility rates since 2007. This decline poses significant challenges, including fewer workers per capita, which threatens economic growth, the sustainability of public benefit programs, and improvements in living standards. This report examines the impact of declining fertility and an aging population on the U.S. economy and explores potential policy solutions.
Impact on Economic Growth and Public Finances
The declining birth rate and aging population are expected to reduce the number of workers per capita, increasing the old-age dependency ratio—the number of people aged 65 and older per 100 people aged 25 to 64. Between 1950 and 2021, the U.S. old-age dependency ratio rose by 97%, and it is projected to increase by an additional 102% by the end of the century. This shift poses significant fiscal challenges, including higher spending on healthcare and pensions, coupled with slower tax revenue growth.
Output Per Capita and Living Standards
Living standards, measured by output per capita, depend on both labor productivity (output per worker) and the proportion of the population that is working. An aging population implies fewer working-age individuals, potentially reducing workers per capita. Therefore, maintaining or improving living standards will require increases in labor force participation and labor productivity to offset the demographic shifts.
Labor Force Participation and the Care Economy
Enhancing labor force participation is crucial to mitigate the economic impact of an aging population. The cost of child care has risen by over 30% in the last decade and more than 200% over the past 30 years, while long-term care costs have increased by 40% over the past decade. The Biden-Harris Administration has allocated historic funding to the care economy, including $39 billion in child care relief funds and $37 billion for home and community-based care services. The Administration’s proposals aim to reduce child care costs and provide universal preschool, potentially increasing labor force participation, especially among women. In April 2024, the female labor force participation rate reached a historical high of 78%, compared to 89% for men, indicating significant room for further growth.
Productivity Growth as a Countervailing Force
Labor productivity, defined as economic output per hour worked, is essential for mitigating the economic challenges of an aging population. Productivity growth can result from improvements in human capital, technological advancements, and increased capital investment. The Biden-Harris Administration has invested in education and training programs, infrastructure, and technology through the American Rescue Plan, Bipartisan Infrastructure Law, CHIPS and Science Act, and Inflation Reduction Act. Historically, U.S. productivity growth has averaged 1.9% annually, outpacing the increase in the dependency ratio. The Bureau of Labor Statistics projects a 1.7% productivity growth rate from 2020 to 2030.
Policy Recommendations
To address the demographic challenges, several policies are recommended:
- Immigration: Expanding immigration can help grow the labor force and maintain fiscal sustainability. Canada’s merit-based migration system serves as a successful model.
- Support for Labor Force Participation: Policies to reduce child care costs and provide family-friendly benefits, such as paid leave, can encourage higher labor force participation, particularly among women.
- Investment in Education and Training: Continued investment in education, training programs, and infrastructure can boost productivity growth.
- Healthcare Efficiency: Enhancing the efficiency of healthcare provision can help manage the increased demand due to an aging population.
Conclusion The decline in the U.S. birth rate and aging population presents significant economic challenges. However, through strategic policy interventions, including immigration, support for labor force participation, and investments in productivity, the negative impacts can be mitigated. These measures will help maintain fiscal sustainability and improve living standards despite demographic shifts. The opportunity – and need – for investment and return for both the public and private sectors is clear.
References
- Centers for Disease Control and Prevention (CDC), Provisional Data, 2023.
- International Monetary Fund (IMF), Economic Outlook, 2023.
- U.S. Bureau of Labor Statistics, Productivity Projections, 2020-2030.
- Economic Report of the President, 2024.
- Center for American Progress, Child Care Deserts, 2022.
- American Rescue Plan, 2021.