A Primer on the Macroeconomic Implications of Population Aging

41 Pages Posted: 20 Mar 2007

See all articles by Daniel E. Sichel

Daniel E. Sichel

Wellesley College; NBER

Larry Slifman

Board of Governors of the Federal Reserve System

Louise Sheiner

Board of Governors of the Federal Reserve System; National Bureau of Economic Research (NBER)

Date Written: January 2007

Abstract

The composition of the U.S. population will change significantly in coming decades as the decline in fertility rates following the baby boom, coupled with increasing longevity, leads to an older population. This demographic shift will likely have a dramatic effect on the long-run prospects for living standards. Moreover, as has been widely discussed in the media and by policymakers, population aging also has significant implications for social programs for the elderly, such as Social Security and Medicare. In this paper, we discuss the consequences of population aging from a macroeconomic perspective and consider alternative paths the economy could follow in response to population aging. The choices society makes among those alternatives will be closely linked to decisions about how to reform entitlement programs for the elderly. The fundamental conclusion of our study is that, barring a significant increase in labor force participation, population aging will lead to a reduction in per capita consumption relative to a baseline in which the demographic composition of the population does not change. The size of any consumption reduction depends critically on whether the adjustment happens sooner or later and on whether the labor force participation of the elderly changes. Important policy questions, then, are whose consumption path falls, by how much, when, and by what means? Decisions about Social Security and Medicare reform are integrally bound up with these fundamental policy questions.

Keywords: Population aging, social security, medicare, living standards

JEL Classification: E21, H55, J11

Suggested Citation

Sichel, Daniel E. and Slifman, Larry and Sheiner, Louise, A Primer on the Macroeconomic Implications of Population Aging (January 2007). FEDS Working Paper No. 2007-01, Available at SSRN: https://ssrn.com/abstract=970259 or http://dx.doi.org/10.2139/ssrn.970259

Daniel E. Sichel (Contact Author)

Wellesley College ( email )

106 Central St.
Wellesley, MA 02181
United States

NBER ( email )

1050 Massachusetts Avenue
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Larry Slifman

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Louise Sheiner

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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