Speech

World Population Trends and Challenges LincolnUniversity JeffersonCity,Missouri October4,2004 For much of the last half century, public I’llbetthatnineoutoftenwillrespondthatthe discussion of population issues has problemwillbecomeextremelyimportantin focused on the proposition that the comingyears.Yet,expertswhostudytheseissues world faced a population explosion. saythattheoddsthatpopulationgrowthwill Manypredicteddireconsequencesaspopulation causerealdifficultyintheforeseeablefuturehave growth rapidly used up supplies of exhaustible receded.Theyemphasizeinsteadthatweface resources such as metals and petroleum. The anotherpopulationproblemthatwillbeathand standardoflivingwoulddeclineascertainessen- verysoon—arapidlyagingpopulation.Indeed, tialresourcesbecameevermorescarceandcostly. wewillsoonfacewithcertaintyproblemsfrom Thispessimisticviewwasnotnew.In1798, anagingpopulation.Today’scollegestudents, ThomasMalthus,inhisfamous“Essayonthe earlyintheirworkingcareers,willbeconfronted PrincipleofPopulation,”arguedasfollows: withthisissue. Becausesofewseemawarethattheimmediate Thepowerofpopulationisindefinitely greaterthanthepowerintheearthtopro- demographicproblemisthatofagrayingpopula- ducesubsistenceforman.Population,when tionratherthananexplodingone,I’vechosento unchecked,increasesinageometricalratio. focusonaginginthislecture.However,I’llbegin Subsistenceincreasesonlyinanarithmetical bydiscussingpopulationprojectionstosetthe ratio.Aslightacquaintancewithnumberswill stagefordiscussingissuesraisedbypopulation showtheimmensityofthefirstpowerincom- aging. parisonofthesecond. Beforeproceeding,Iwanttoemphasizethat Thus,inMalthus’sview,populationgrowth theviewsIexpressherearemineanddonot willinevitablyoutstriptheearth’scapacityto necessarilyreflectofficialpositionsoftheFederal producefood,resultinginwidespreadfamine, ReserveSystem.Ithankmycolleaguesatthe disease,andpoverty. FederalReserveBankofSt.Louisfortheircom- Modernconcernoverpopulationgrowth ments,especiallyDaveWheelock,assistantvice shareswithMalthustheviewthatpopulation presidentintheresearchdivision,whoprovided pressureswillhavedireconsequences.However, extensiveassistance.However,Iretainfullrespon- theMalthusviewthattheseconsequencesare sibilityforerrors. inevitable—theviewthatearnedeconomicsthe label“dismalscience”—isnotsharedbyinformed observerstoday.Forsome,advocacyofrigorous WORLD POPULATION methodsofpopulationcontrolhasreplaced PROJECTIONS resignedpessimism.Forothers,aworldwide declineinthebirthrateseemstobesolvingthe WhenMalthuswrotehistreatisein1798,the problemwithoutfurthergovernmentaction. world’spopulationtotaledsome900million Ifyouaskpeoplewhetherwemustcontinue persons.Today,worldpopulationisroughly6.4 tobeconcernedaboutapopulationexplosion, billionpersons,andabout100millionpersons 1 ECONOMICGROWTH areaddedtothetotaleveryyear.Althoughwedo arepredictingthatworldpopulationwilltotal witnessfamine,disease,andpoverty,asMalthus 8.9billionpersons. predicted,thesesadeventsareusuallyisolated Interestingly,bymid-century,U.N.forecasters andreflecttemporaryproblems,oftencreatedby predictaworldaveragefertilityrate—thatis,the civilwar.Acrosstheworld,foodisgenerallymore averagenumberofchildrenawomanwillbearin abundantandlessexpensive,measuredinterms herlifetime—of1.85.Atthatrate,fertilitywillbe oftheamountoflaborthatmustbeexpendedto belowthelevelnecessaryforpopulationtostay obtainagivenlevelofnutrition,thanithasever constant—about2.1childrenperwoman.Conse- been.Agriculturalproductivitycontinuestorise quently,worldpopulationisexpectedtobegin rapidly,anditseemsunlikelythatworldfood decliningsometimetowardtheendofthiscentury. supplywillbeaconstraintonpopulationgrowth Suchprojectionsmustalwaysbetakenwith foryearstocome,ifever. agrainofsaltbecausetheyarebasedonanumber Still,inlightofrapidgrowthoftheworld’s ofassumptionsthatmaynotturnouttohold.In population,especiallyoverthelast50years,many theearly1930s,U.S.governmentforecasters peoplehavequestionedwhetherourcurrent predictedthatattheendofthe20thcenturyour populationissustainable.EchoingMalthus,some nation’spopulationwouldtotal145to150million commentatorsclaimthatthecontinuingpopula- persons.Theforecastersdidn’tcountonthebaby tiongrowthwillcreateunsustainablepressures boomthatcamealongafterWorldWarII,however, ontheworld’sresourcesandraisepollutionto andtheirforecastturnedouttobefartoolow.By dangerouslevels.Particularlyprominentinrecent 2000,U.S.populationhadreachednearly300 discussionsisthethreatofglobalwarmingfrom million,ortwicethelevelintheforecastmade emissionsofgreenhousegases. 70yearsearlier. I’vealreadynotedthatpopulationgrowth Let’sbeginwithrecentprojectionsofworld duringthelast50yearsorsohasbeenfarhigher populationgrowthfromtheUnitedNations.A inrelativelypoorcountriesthaninhigherincome notabledevelopmentisthechangingdistribution countries.Muchoftheincreaseinworldpopula- ofpopulationbetweentheso-called“developed” tionprojectedforthenext50yearsisalsoforecast and“lessdeveloped”nations.Populationgrowth tooccurinlesser-developedcountries(LDCs). hasbeenmuchfasterinthepoorercountriesthan WhereasLDCshaveatotalpopulationof5.1bil- inthosewithhighstandardsoflivingandwealth. liontoday,thosecountriesareprojectedtohave WhereasthedevelopedcountriesofEurope, 7.7billionpersonsandapopulationgrowthrate NorthAmerica,Australia,andNewZealand of0.40percentin2050.Bycontrast,manydevel- accountedforroughlyone-thirdofworldpopu- opedcountriesareprojectedtohavefallingpop- lationin1900,andaboutthesamepercentagein ulationsby2050. 1950,by2000,thosecountriesaccountedforjust Onthesurface,thedisparatepopulation 20percentofworldpopulation.Itseemslikely, growthratesofthedevelopedanddeveloping however,thatthepopulationgrowthofmany worldsmayseemcauseforalarm.Indeed,rapid lesser-developedcountrieswillslowduringthe populationgrowth,atleastintheshortrun, presentcentury,asIwilldiscussinthesecond impliesthatpovertylevelswillriseunlesssup- partofmytalk. pliesoffood,shelter,andotherscarceresources Worldpopulationhasmorethandoubledin increaseasrapidly.Inmanydevelopingcountries, thelast50years,andhasnearlyquadrupledsince employmentgrowthlagsthegrowthrateofthe 1900.Currently,worldpopulationisgrowingat workingagepopulation,leadingtofallingwages, arateof1.35percentperyear.TheUnitedNations’ unrest,andemigration. mostrecentforecast,however,predictsaslowing However,ifwelookatthereasonsforthe inthegrowthofworldpopulationtoabout0.33 disparategrowthratesofpopulationbetween percentperyearby2050,atwhichtimeforecasters thedevelopedanddevelopingworldinthe20th 2 WorldPopulationTrendsandChallenges century,therearereasonstobemoreoptimistic tilityrateswerealreadylowin1970.In2000,only aboutthefuture.Forcenturies,theworld’spop- fourdevelopedcountries—Albania,Iceland, ulationgrewslowly,ashighratesofmortality NewZealand,andtheUnitedStates—reported largelyoffsethighbirthrates.Wars,famines,and fertilityratesatorabove2childrenperwoman. epidemicdiseasescausedmanypeopletodie WiththeexceptionoftheUnitedStates,theseare young,andaveragelifeexpectancywasconse- allsmallcountries. quentlylow.InEurope,conditionsbeganto Thefertilityrateisbelow2inmostdeveloped improvebythe17thand18thcenturies,with countries,andinmanycasessubstantiallybelow. increasedfoodsuppliesandimprovementsin SomerepresentativeexamplesaretheUnited personalhygieneandpublicsanitation.Bythe Kingdom,1.6,Germany,1.4,Italy,1.2,andJapan 19thandearly20thcenturies,mostEuropean 1.3.ThefertilityrateintheUnitedStatesis2.1. andNorthAmericancountrieshadexperienced TheUnitedNationsattributesthesubstantial a“demographictransition”fromhighratesof declineinfertilitythroughoutmostoftheworld fertilityandmortalitytolowrates. toincreaseduseofcontraception,especiallyin Inmostcountries,thedemographictransition LDCs,andtoanincreaseintheaverageageat isseenfirstinadecliningmortalityrate.Because whichwomenbeartheirfirstchild,whichhas thebirthrateinitiallyremainshigh,population beenmorepronouncedindevelopedcountries. growthincreasessharply.Asthetransitionpro- Bythe1990s,themedianageatfirstbirthwas ceeds,however,thebirthratedeclinestoapproxi- matethelowermortalityrate.Populationgrowth 26.4yearsindevelopedcountriesand22.1years thenslows.Mosteconomicallydevelopedcoun- indevelopingcountries. trieshavecompletedthistransition,butLDCs areattheintermediatestageoflowmortality,but stillhighfertilityrates.Consequently,theirpop- A GRAYING POPULATION ulationgrowthisrapid. Adeclineinthebirthrateobviouslymeans Thedataindicate,however,thatfertilityrates thatpopulationgrowthwillslow.Butnofancy havedeclinedsubstantiallyduringthelast20to calculationsarerequiredtounderstandthata 30yearsinmanyLDCs.From1970to2000,the sharpdeclineinthebirthratewillalsocreatean medianfertilityrateamongLDCsdeclinedfrom imbalanceinapopulation;thedeclineinthe 5.9childrenperwomanto3.9childrenper numberofyoungpeopleinevitablymeansthat woman.Ifthesetrendscontinue,thenpopulation theproportionofolderpeopleinthepopulation growthwillslow.Iffertilityratesdonotchange willrise. fromcurrentlevels,however,theU.N.projects Whiletheworld’spopulationgrowthhas thattheworld’spopulationwillbe12.8billion slowed,therehas,therefore,alsobeenanaging personsin2050,insteadofthe8.9billionitfore- ofthepopulation.Agoodsummarymeasureof castsasmostlikely. Indeed,theU.N.projectsthattheaveragefer- apopulation’sageisthemedianage—theage tilityrateamongLDCswillfallbelowthereplace- suchthathalfthepopulationisolderandhalfis mentrateby2050.Thus,towardtheendofthe younger.Overthelasthalfcentury,themedian century,populationinthosecountriesislikely ageoftheworld’spopulationhasincreasedby tobegintodecline.Some20nationsclassifiedas 2.8years,from23.6in1950to26.4in2000.The lesserdevelopedalreadyhavefertilityratesbelow U.N.forecastsmedianagetoriseto36.8yearsin replacementlevel,asdosome39othernations. 2050.More-developedcountriesareexpectedto SeveralLDCscontinuetohavehighfertilityrates, haveanincreaseinmedianagefrom37.3years however,andtheseincludemanyoftheworld’s to45.2years,andlesserdevelopedcountries poorestnations. from24.1yearsto35.7years.Japanistodaythe Fertilityrateshavealsodeclinedinmany countrywiththeoldestpopulation,havinga developedcountries,includingsomewherefer- medianageof41.3years.Japanisprojectedto 3 ECONOMICGROWTH haveamedianageof53.2yearsin2050.The callydemandingwork,andtheydid.Thetruly medianageoftheU.S.population,bycontrast, dependentwerethosewhowerebedridden,and iscurrently35.2years,andisforecasttobe39.7 withthemedicaltechnologyavailableinthose yearsin2050. daystheyusuallydidnotliveverylonginsuch Theworld’sfastestgrowingagegroupiscom- acondition. prisedofthosepersons80yearsandolder.In TheUnitedStatesandotherhigh-income 2000,69millionpersons,or1.1percentofworld countrieshavepensionsystems,suchasour population,wereaged80orolder.By2050,the SocialSecuritysystem,tosupporttheelderly. numberaged80orolderisexpectedtomorethan ButtheSocialSecuritysystemsetstheretirement quintupleto377millionandbe4.2percentof datebythecalendarandnotbycapacitytowork. worldpopulation.Inthatyear,21countriesor Thus,todaymanyandperhapsmostretirewhile areasareprojectedtohaveatleast10percentof physicallyabletoworkproductively. theirpopulationaged80orover.Indeed,Japan This“graying”ofthepopulationposesa isforecasttohavealmost1percentofitspopula- seriousfiscalproblemasthedependencyratio— tioncomprisedofpersonsaged100ormore.The theratioofpersonsoutofthelaborforcetothe UnitedStatesisprojectedtohave7.2percentof numberofpersonsinthelaborforce—rises.Gov- itspopulationmadeupofthose80andolder. ernmentpensionsystems—SocialSecurityin Tounderstandtheimplicationsofthegraying theUnitedStates—iswherearisingdependency population,thinkaboutafamilylivingonthe ratiohasitsmostobviousimpact.SocialSecurity, U.S.frontier150yearsago.Thefamilywaslargely likethepublicsystemsofmostcountries,isa self-sufficient,growingitsownfood,makingits “pay-as-yougo”system,meaningthattoday’s owncandles,andbuildingitsownhousewith benefitpaymentstoretiredpersonsarefunded someassistancefromneighbors.Theworking bycurrenttaxesonworkingpersons.Obviously, membersofthefamilyhadtogrowthefoodfor asthenumberofthosereceivingbenefitsrises theentirefamily,includingchildrenandelderly relativetothenumberpayingtaxes,theaverage grandparents.Thechildrenwenttoworkata taxpayermustshoulderalargerandlargerburden youngage,andthegrandparentsworkedinthe or,alternatively,benefitsmustbecut. fieldsaslongastheycould.Thelargerthenum- OnewaytothinkaboutSocialSecuritytaxes berofchildrentooyoungtoworkandthelarger todayisthattheyarelikethefoodgrownbythe thenumberofdisabledelderly,thegreaterthe frontierfarmerandhiswifethattheydonotget burdenonthoseintheirprimeworkingyears. toconsumebecausethefoodgoestotheirparents Thechildrenandtheelderlyweredependents, andchildren—theirdependents.Someofthe supportedbythoseworking. incomeearnedbythoseworkingtodayhastobe Thefactthatweliveinahigh-incomeindus- divertedtoprovidebenefitsforretireddependents. trialsocietydoesnotchangethefactthatthose Theburdenwillrisesubstantiallyincoming workinghavetoproduceallthegoodsandserv- yearsbecausethenumberofretireeswillrise icesconsumedbytheentirepopulation.Non- relativetothoseatwork. workingdependentsaredependentsjustassurely Therehasbeensomecarefulworkonthis todayastheywereonthefrontier150yearsago. subjectbytheOrganisationforEconomicCo- Thoseofyousoontobeintheworkingpopula- operationandDevelopment(OECD),anorgani- tionwillhavetosupportyourselvesandthe zationcomprisedofeconomicallyadvanced dependentpopulationofchildrenandelderly. democraticcountries,includingtheUnitedStates. InfrontierAmerica,theelderlydidnotretire OECDprojectionsindicatethatpublictransfers toFloridaontheirSocialSecurityandotherpen- toretiredpersonsforpensionsandhealthcare sions.Theyinfactworkedaslongastheywere willincreaseintheaverageOECDcountryby6 abletowork.Theymightnotbeabletodoheavy percentofGDP,from21percentto27percent, workinthefieldsbuttheycoulddolessphysi- betweennowand2050.Unlesspromisedfuture 4 WorldPopulationTrendsandChallenges benefitsarecutsignificantly,substantialtax thatthosewhoareretiredcanhavetheconsump- increaseswillbenecessarytoeffectsuchtransfers. tiongoodsinstead. However,asarecentOECDreportconcludes, Thisdiscussionshouldmakeclearthatthe drastictaxincreasescouldmakemattersworse fundamentalproblemoursociety—andallaging byreducingtheincentivesformarketworkand societies—faceisnotfundamentallyafinancial forsaving.1Indeed,theOECDconcludesthatin problembutinsteadaproblemofanexcessive manycountriesitmaybenecessarybothtoreduce numberofretiredpeoplerelativetoworking promisedbenefitsandtoincreasetheincentives people.Thisisaproblemwecansolve,anditis forwork. reallyahappyprobleminmanyways.Weare Inrecentdecadestherehasbeenatendency livinglongerandinmuchbetterhealth—that forpeopletoenterthelaborforceatahigherage can’tbeaproblem! whileretiringatanearlierage.Consequently,the Nevertheless,animplicationoflivinglonger proportionoflifespentworkinghasdeclined. shouldnotbethatyoungerpeoplehavetobear Thisphenomenonreflectsanumberoffactors, theentireburdenofprovidinggoodsretirees includingincreasingreturnstoeducationand willconsumeforthoseadditionalyears.WouldI increasinglygeneroustransferprogramsthat askmyownchildren,whohavetheirownprob- encourageearlyretirement.Incountriesthat lemsofsupportingthemselvesandtheirfamilies, experiencedapost-WorldWarIIbabyboom,large tosupportmesoIcanenjoyalifeofretiredleisure increasesinthelaborforceinthe1960sand1970s ofmanyyearsoftravelandsailing,whichare reducedthedependencyratioandenabled twoofmypassions?Iwouldn’tdothatlooking increasinglygeneroustransferpaymentstoretired myownchildrenintheeye,andIdon’tthinkwe persons.However,iflifeexpectancycontinuesto asasocietyshouldcollectivelyasktheyounger increase,asdemographersproject,thedepend- generationtosupportalltheadditionalyearsof encyratiowillriseandsuchtransferswillcon- retirementofthebabyboomgenerationthat stituteanincreasingburdenonthoseworking. modernmedicinemakespossible. Itisworthemphasizingthatasimportantas Unlessthoseinmygenerationandthebaby- itistoputtheSocialSecurityandMedicaretrust boomgenerationwanttoplaceahugeburdenon fundsonasoundfinancialbasis,doingsodoes ourchildrenandgrandchildren,weneedtoadopt notnecessarilysolvetheproblemcreatedbya somecombinationoftheonlytwopossiblesolu- highdependencyratio.Wecanunderstandthis tions.Oneistoreducetheannualpaymentsto pointeasilybysupposingthattheSocialSecurity SocialSecuritybeneficiaries,andtheotheristo trustfundalreadyheldenoughU.S.government reducethenumberofretirementyearsbyraising bondstocoverlargebenefitpaymentsincoming theretirementage.Thesechanges—whatever years.Whenthetrustfundsoldbondstoprovide mixthecountrydecidesitprefers—shouldbe fundstomakebenefitpayments,whowouldbuy phasedingradually,toavoidanundueimpact thebonds?Theelderlywouldn’tbebuyingthe onthosewhoareclosetoretirementtoday.My bonds—theyaretheoneswhoneedthebenefit ownpreferenceistoconcentrateonraisingthe checkstopayforeverydaylivingexpenses.The retirementageforfullbenefits,giventhatpeople workinggenerationwouldhavetobuythebonds— arehealthyandproductivemuchlongerthan interestrateswouldhavetobehighenoughto theyusedtobe. persuadeenoughmembersoftheworkinggener- Ratherthanmovingtowardalaterretirement ationtobuybonds.Theirpurchaseswouldpro- age,thepublicpensionsystemsofmanycoun- videthecashtheSocialSecuritySystemwould triestodayactuallyencourageearlyretirement needtopaybenefitstotheretiredgeneration.In byofferinggenerousbenefitpaymentstoearly short,somebodyhastogiveupconsumptionso retirees.Althoughearlyretireestypicallyreceive 1 OECD.“StrengtheningGrowthandPublicFinancesinanEraofDemographicChange.”May2004. 5 ECONOMICGROWTH asmallerannualpensionthanpersonswhowait by2000,thoseadditionalyearsatage65had untiltheyareoldertoretire,thedifferencein risentoabout18.Itmakessensethatweliftthe manycountriesisinsufficienttodiscouragelarge ageofeligibilityforSocialSecuritypaymentsin numbersofpeoplefromretiringearly.TheUnited recognitionoftheincreaseinourexpectedlife Statesissomethingofanexception.Foraman spans.However,itisclearthattheincreasein withaverageincome,ourSocialSecuritySystem normalretirementagefrom65to67thatisin isroughlyneutralbetweenages62and67.Beyond currentlawdoesnotgofarenoughtosolvethe thatage,however,theincentivetoremaininthe problem. laborforceislow.Putanotherway,theimplicit TheOECDhasrecommendedanumberof taxofremaininginthelaborforce—foregone otherreformstoitsmembercountriestoencour- benefits—isrelativelyhigh.Atatechnicaldesign ageolderpersonstoremainactiveparticipants level,thereareanumberofpossiblewaystocre- inthelaborforce.Theseincluderemovinglabor ateamoreneutralsystemwithrespecttoretire- marketrigiditiesthatdiscouragepart-timeemploy- mentage,sothatataminimumthosewhowant mentandimplementingreformsthatwould toworklongerarenotpenalizedfordoingso.The increasetheshareofretirementincomefrompri- ideaisthatannualbenefitsneedtobehigherby vatesourcesrelativetopublicpay-as-you-gosys- anactuariallyfairamountwhenretirementis tems.Suchpolicyreformscouldhelpalleviate delayed. thefiscalchallengesposedbyagingpopulations ArecentOECDstudyfoundaclosecorrela- bothbyloweringdependencyratiosandbyfavor- tionbetweenincentivestoretireandretirement ingeconomicgrowth. behavior—notsurprisingly,peopledorespond toincentives!Theimplicationofthisresearch, accordingtoitsauthors,isthatlaborforcepar- CONCLUSION ticipationinthe55-to-64agegroupwouldbe DemographicchangeintheUnitedStates increasedsubstantiallybyreformsthatabolished andelsewhereintheworldpresentsenormous policy-inducedincentivestoretireearly.Indeed, challenges.Inmuchoftheworld,thecombina- thereportgoesontosuggestthatpolicymakers tionofincreasedlifeexpectancyandareduced shouldconsiderskewingincentivesagainst birthratehascreatedasituationinwhichthe retirement,atleastuptosomeage,inrecognition populationisbecomingunbalancedinitsage thatpeoplewhoworkprovideanetpositive distribution.Weknowthisproblemisrightahead impactonpublicbudgets.2Bycontinuingtowork ofus,becausethepeoplehavealreadybeenborn. pastnormalretirementage,peoplesupportthem- IhopeIhaveconvincedyouthatSocialSecurity selvesandpaytaxesthathelptoreducethetax andMedicarearenotjustproblemsyouwill burdenthatwouldotherwisefallonothers. havetodealwithwhenyoucomeclosetoretire- Severalcountrieshavebeguntoreinintheir mentage,butproblemsyouwillhavetoaddress publicpensionsystemsbyinstitutingreforms withinafewyears.Taxestosupporttheseretire- thatreduceincentivestoretireearlyorbyraising mentprogramswillfallonyou,andnotonthose theageatwhichpersonsareeligibleforbenefits. alreadyretired.Retireeswillfacethepossibility TheUnitedStates,forexample,hasinplacea ofbenefitcuts,tobesure,butyouwillfacethe gradualincreaseintheretirementageforfull problemoftaxincreases.Wearetrulyallinthis SocialSecuritybenefitsfromage65toage67by situationtogether,andwehadbetterfindaway 2025.OurSocialSecuritysystemwasbegunin todealwithittogether. the1930swhentheaverage65-year-oldperson couldexpecttoliveaboutanadditional13years; 2 Thisresearchissummarizedin“StrengtheningGrowthandPublicFinancesinanEraofDemographicChange.”OECD,May2004. 6

William Poole (2004, October 3). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20041004_poole

@misc{wtfs_speech_20041004_poole,
  author = {William Poole},
  title = {Speech},
  year = {2004},
  month = {Oct},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20041004_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}