The Aging Population in the United States and its Effect on our Economy

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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 country’s 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, economical, 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 peaks at retirement age and then declines thereafter indicating that people will have 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 productivity 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 organizations 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. The previous age for most recipients was 65 years and 2 months, and increases to 67 years by the year 2022 (Dohm, 2000). Along with the higher required age for collecting Social Security, pension benefits are also being reduced. Congress in 2000, eliminated the earnings limit on the amount that Social Security recipients Aging Population 5 between the ages of 65 and 69 can earn before having to forfeit part of their Social Security benefits. Together, these Congressional policy changes could keep people in the work force longer. Another potential cause of people working longer is the retirement age is likely to rise with the trend of companies changing how their pension plans are distributed. Defined contribution pension plans are replacing defined benefits. The Bureau of Labor Statistics (BLS) conducted a survey of medium to large companies which showed that among full time employees, participation in defined benefit pension plans declined from59 percent in 1991 to 50 percent in 1997. Defined benefit plans provide the maximum benefits when taken at the earliest possible age of eligibility. In contrast, under defined contribution plans such as 401k’s, the amount of benefits accrued depends on the amount contributed to the plan by employees and employers, as well as the success and growth of the investment in the pension fund. A study by the American Association of Retired Persons (AARP) provides further evidence of an extended work life for baby boomers. 8 in 10 survey participants plan to work during their retirement years though not necessarily at the same job or full time. A Current Population Study conducted by the Bureau of Labor Statistics reveals a number of interesting details of the composition of the order labor force.

With strong Aging Population 6 laws preventing discrimination of age and gender, more women have entered the work place. More women in the workforce will also have an impact on the economy. Gender compositions studies show that woman leave the work force after age 55 more rapidly than men. As a result, occupations that employee predominately more woman in their field (teachers, nurses, health support) will see a large number of employees exiting at an earlier age, within a short period of time.

New employees will need to back fill these positions and with fewer numbers of potential employees, this could create an improved employment situation for the country. Many Small businesses will feel the demographic shift. With the population aging and the decrease in the younger work force, small business will be impacted. Small businesses are forced to raise wages and benefits to compete with larger corporations and to attract employees. With higher expenditures the cost of maintaining profits will prove to be a challenge.

The United States economy will feel the strain by lower out-put from the businesses. With the potential for production capacity to shrink as the work force declines, the impact on the economy will be substantial. Some economist state that only exceptional growth in productivity will ensure sufficient resources to sustain rising standards of living for the aged and working Americans. Besides small businesses, other markets will feel the effects of the aging population. The United States economy is largely based on consumption and the older population as Aging Population 7 consumers will change the economy. Individuals aged 55 and older control more than three-fourths of this country’s wealth and the 65 plus group has twice as much per capita income as the average baby boomer (Weisman, 2005). With more financial resources and buying power, the seniors of today are redefining the marketplace.

This age group is one that can not be ignored. The marketplace which traditionally focused on the younger generation is now scrambling to address the needs of the older generation. Older baby boomers spend there money differently than the younger boomers. Younger boomers born between the years of 1956 – 1964, are still focused on spending their money on children and mortgages. The older boomers born during the years, 1946-1955, are now mostly empty-nesters, and spend their money on upgrading their current homes, and personal effects (Booming, 2007). With the consumer market shifting to an older generation, many changes can be seen. Today’s marketplace is starting to change to adapt to the new growing consumer group.

Companies must shift their attention to the population that is the growing in size and has the capacity to purchase what they are marketing. The market place today is changing before our eyes. Dating services that once catered to the young and beautiful, are finding a bigger market with the baby boomers. More baby boomers are on-line than ever. Dating and social networking sites are gaining more acceptance with society and the older population. On-line services are expected to grow exponentially. With this Aging Population 8 growth, advertising is changing as well.

Advertising on web sites that cater to the older population is a booming business. Where magazine ads and television commercials were once the prevalent marketing media, one only needs to peruse the web pages geared to the older generation to see this is a niche market.

While researching the baby boomers as consumers for this paper, I was amazed at the advertisements geared for this generation. The number of ads popping up between paragraphs, made reading the articles challenging. There were advertisements for cell phone ringtones for the mature person, healthcare items which promise to enhance or to improve quality of life, home improvement services, dating services, etc. The data that was found concerning the aging population and the economy, leads me to believe that our economy will be just fine. Executives, marketing groups, and entrepreneurs who are paying attention, should be able to tap into this robust aging generation of consumers.

Yes, there is an economic shift occurring in the Unites States with the aging population. The sheer number of people in the baby boomer generation is certain to make an impact, but not necessarily a negative one. This generation of baby boomers is not only willing, but is able to keep this economy rolling. References Booming Business, Forever Trends, (August 2007)retrieved June 30, 2010 from www. trendwatching. com/trends/boomingbusiness. htm Brock, Jennifer, The Aging of America, (May, 2010) retrieved June 28, 2010 from https://www. cba. gsu. edu/magazine/aging. html Dohm, Arlene, Gauging the Labor force effects on retiring baby-boomers, Monthly Labor Review, (July 2000) https://www. monthlylabor review. com/human-resources. tml retrieved June 24, 2010. Fehr, Hans and Jokisch, Sabine (February, 2005). Aging, the world economy and the coming generational storm. National Center for Policy Analysis. Retrieved June 23, 2010. www. ncpa. org/pub/st/st273. Isidro, Isabel, M. (June 2009). The aging population and its effect on small business, Power Home Biz, https://www. powerhomebiz. com/vol12/aging. htm, retrieved June 24, 2010, U. S. census Bureau, Census 2000 special report, issued December 2004. Weisman, Jonathan, Aging population poses global challenges, Washington Post, (February 2005) , https://www. washingtonpost. com/as2. Retrieved June 28, 2010.

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The Aging Population in the United States and Its Effect on Our Economy. (2017, Sep 18). Retrieved July 14, 2024 , from

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