Have you ever wanted or needed something that you had to save up to afford? The gap between what you can spare to put away and what you need seems impossibly big. But you sacrifice, and stay patient, and try to keep your eye on the prize. Finally, the anticipation is over and the day arrives. You head to the store … and the price has doubled. What are you feeling now?

With an aging population, something a little bit like this may loom for us all. The big saving-up in a person’s life is for retirement. Few of us look forward to working our whole lives, and so we put money away. But as the proportion of people working shrinks, when we are retired, how much will be on the shelves? What will it cost? How far will my savings go?

Moving money

The economics of aging is, in one sense, about time. We grow up and we grow old. Our wants, needs, means, and abilities change with us. So what, then, is the relationship between our age and our choices?

A simple treatment of this question appears in the typical introductory microeconomics course: I can consume my wealth now or later; I have preferences that say how I’m willing to trade off consumption now versus later; interest rates and the availability of loans constrain my ability to trade off. Given my preferences and constraints, how will I choose to spread my wealth across time?

We know, by the way, that the average person is not great at sticking to long-term plans. This should be no surprise to you if you have ever procrastinated—which should probably cover everyone. One of the most successful contributions of the field of behavioral economics is to develop tractable models that rationalize procrastination, succumbing to temptation, and the need for commitment devices. This has fed a successful research program into ways to incentivize sufficient saving for retirement. For example, we have evidence that if pension plans have automatic rather than opt-in enrollment, participation and contribution rates go up.

So far so good: we have solid, basic theory and empirical evidence to think about how people will spread their consumption over their lifetime, and how policy might help to shape their decisions. But there is a larger, collective problem: the economics of aging is also about the eternal now, the present, when people of all ages coexist.

What’s your money worth?

Let’s focus on pensions. This is a bit unfortunate since pensions are hardly the most exciting things in the world. At face value they’re a financial concept: a person moves money through time, saving now to spend later, just as our basic microeconomics had it. As with all financial concepts, though, we can see more when we keep our eye on things rather than money. A person saves in order to buy things later, and money is just the medium.

Ultimately, the money in your pension pot and the money in the paycheck of a working person are means to the same end. In the great marketplace of the economy, no one cares about your sweat and your sacrifices that gave you the money in your hand. Your money is just as good as everyone else’s. So pensions might be a sleepy, mundane tool, but their grand purpose in the economy is a little different than their purpose to an individual: how will the stuff we have and make be divided between the retired and the working?

The issue is that without stuff, the tool fails. Our savings—individually and collectively—are useless unless there’s enough stuff. The thought experiment is easy: if everyone decided, today, to stop working and live off what they had, quite soon we’d have nothing to do, eat, or enjoy, except possibly keeping an eye on our now-worthless cash. This is one of the scary problems of an aging population. The U.S. Census Bureau estimates that the proportion of people aged 65 or older in the U.S. will increase from 13 percent in 2010 to 20 percent in 2030. Let’s imagine that the proportion of retirees by age stays the same. Even if all of these retirees have chosen or been coerced to save a nice big chunk of their lifetime earnings, the working population will have to produce quite a lot more per worker if we’re all to get what we think we deserve.

We’re all in this together

The economics of aging is therefore an inescapably public problem. The individual decision of how much to spend and save is part of a larger whole. When we aggregate all of the personal decisions in the economy, we get an interconnectedness that requires collective introspection and decision-making. Indeed, public pensions—social security programs—make plain this interconnectedness, since the funds for social security payments must come from tax revenues largely raised from the working population.

Economic policy inevitably shapes and constrains our choices in different ways at each stage of our lives—student loans, tax credits, interest rates, unemployment benefits, the retirement age, Social Security—and so to think about an aging population means thinking about how policy can and should respond. This is not just at the micro level, “nudging” employees to sign up for pension plans, but it is also at the national and international level: as the dependency ratio of non-working to working in the population rises, having enough stuff to go around gets tougher.

Lest this seem like a horrible fate, it’s worth remembering that the rise in the dependency ratio is a side effect of otherwise welcome progress. The decline in the fertility rate in rich countries over the past half-century is at least in part due to the economic empowerment of women. The rising share of the population over 65 is not just a legacy of the baby boom but also due to the continuing rapid advances in life expectancy since the mid-1800s. This is good! If we could be satisfied to consume a little less, perhaps we could enjoy the benefits of these developments in the form of more time away from work over our lifetimes.

Notice that we’ve also left aside the fact that a retired person is quite able to productively contribute to society. In particular, not all of these ways will show up on the balance sheet: wisdom, stewardship, citizenship, and family are not typically accounted for in the national books. There is surely a richer conception of wealth than just the tangible things that can be bought and sold for which we are on average richer rather than poorer for our increasingly long retirements.

But despite the positive aspects of the demographics, in a world where so many have so little and we all seem to want more, we can’t rely on the luxury of leisure and reflection. We have to figure out how to keep making enough for everyone.

The old versus the young

So what do we do? Possible remedies are hardly appealing. Should we advocate for people to work longer in life? This would involve reversing a decades-long international trend in labor force participation. Smaller social security payments to retirees? Good luck selling that one to those who are on the verge of leaving the workforce.

The trend in the dependency ratio is one reason why economists are, on average, pro-immigration. Leaving aside the ethical problem of treating humans born in other countries as though they come from a faucet that we turn on and off as the economy demands, encouraging immigration is perhaps the easiest way for a country to get younger in a hurry. Not that this seems remotely feasible in the current political climate in Europe and North America, where the perception persists that immigrants take a share from those already in the country rather than increasing the size of the pie.

The intergenerational nature of the collective-scale aging problem means that self-interested answers to both the big-picture and policy-level questions will naturally schism on age. Political disagreement across generations is nothing new—kids today!—but these issues more nakedly promote antagonism between young and old. The little white lie that pensions, public and private, are a strictly personal and intertemporal pot, with sacrifice now to pay in and its counterweight drawing down later, makes the political battle touchier. How can you begrudge the anticipated social security benefits to a person who has “paid in” to the pot for their whole working life?

So get ready for some pitched political battles. Any dramatic change in a policy that affects economic choices over the life-cycle cries out for comprehensive political involvement of people of all ages. Is such a thing possible in a world in which young people are increasingly disengaged from politics?

Big questions

In my dream world of economic policymaking we could work upwards from our collective opinion on the deep version of the question: how do we divide stuff between the retired and the working? The societal response to aging relies on policies that are deeply personal, affecting the life plans and finances of each of us. We each hope to take care of ourselves and our loved ones as we get older, but our decisions don’t stand alone. And beneath it all is the question of principle we must decide on. We can answer it either implicitly, as a byproduct, or explicitly, head-on. Why not take the honest route?

Whenever we strip away the nuts and bolts of economic policymaking to try to get to the ideas beneath, questions like this crop up. How should we divide stuff among the young and the old? The employed and the unemployed? The wealthy and the poor? Urban areas and rural areas? Debates over policy details—tax rates, welfare checks, public works investment–are opiates against the moral quandaries of the tough questions that no scientist or politician can settle for us. The public discourse would be more useful if it was framed in terms of the underlying question rather than the arcane details. Laws could better engage with this discourse if they were written in simple, broad terms that a layperson can read.

The underlying questions are what we must take a stand on, individually and collectively, but they have no right or wrong answer. The least we must do is to acknowledge the constraints that we face. In the case of aging, it does no one any good to pretend that things can go on as normal in the face of profound demographic shifts. But rather than structure our debate around one policy or another, let us instead think humanistically, about the underlying question. How should we divide what we have? And only then: how can we do it?

Further Reading

Image Credit: Cristina Valencia via flickr

About The Author

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James Campbell
Academic Correspondent, Economics

James Campbell is an economist specializing in applying methods from game theory, microeconomic theory, and graph theory to topics including targeting in social networks, privacy regulation, coordination problems, and open access policies. He received a B.A. in Economics and Management from Oxford University in 2005 and a Ph.D. in Economics from Brown University in 2010. Since 2010 he has been appointed as an Assistant Professor at the University of Toronto, and is currently appointed as a Visiting Assistant Professor at Brown University. His research has been published in the Review of Network Economics, Quantitative Marketing and Economics, and the Journal of Economics and Management Strategy.