What Could an Aging Population Mean for the US Economy?

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The original version of this article was written and published by our colleagues in Goldman Sachs Asset Management.

Populations change over time in many ways – average age, average number of children, birth rates, life expectancy. Each of these changes can have a significant economic impact. Today, many of the world’s economies are experiencing the most rapid demographic change since World War II, bringing these factors into fresh focus.

Most developed countries are experiencing declining fertility rates and an aging population. While our demographic challenges in the US aren’t as severe as many others, we are starting to see the effects.

Why the aging of society matters

Other factors being equal, the aging of a society has the potential to influence the economy in multiple ways.

Economic growth. As a population ages, economic growth can weaken. This is mostly because an aging population can mean fewer people of working age and declining productivity from the workforce as a whole. A smaller, less-productive labor force could slow GDP growth.

Inflation. A smaller labor force also may produce fewer goods and services, and decreases in supply can push prices up. But if demand from an aging population shifts to spending categories with ample supply, the inflationary impact may be difficult to judge.

Interest rates. Rates tend to go down when people save more and go up when they borrow and spend more. According to a 2016 study from the Federal Reserve Bank of San Francisco, the main channel through which demographics affect real interest rates is the increase in life expectancy – people save more when they believe they will spend longer in retirement. However, the net effect probably depends to some extent on the ratio of young borrower/spenders to middle-aged savers, and this ratio tends to change over time.

Investment and business capitalization. An aging workforce may invest less in the stock market. As they near retirement, older workers may sell off investment assets to pay expenses (for health care or other needs), or they may move funds out of the stock market into fixed income or cash as their risk profile becomes more conservative with age. Lower equity investment can affect business capitalization.

Consumption patterns and income distribution. Aging societies typically need to rebalance their economies to devote a larger share of national income (private and/or public) to social and health care. The potential effects are numerous, including strains on government and private resources, higher payroll taxes, changes to benefit systems, and reduced demand for other goods and services.

Housing demand. An aging population tends to need more apartments and senior living facilities. But a drop in demand for single-family homes can be negative for the housing market.

This isn’t to say that only aging societies face challenges. Economies with rapidly growing prime-age populations (ages 25-54) may enjoy benefits like stronger potential GDP growth but also may face challenges like creating enough jobs to meet the needs of their people.

Why predicting the impact is complicated

Measuring the impact of population aging on economic growth can be complex. Notice that we said earlier “other factors being equal”? Demographic changes don’t happen in a vacuum, and factors like the adoption of artificial intelligence (AI), government policies and labor market dynamics can blunt or intensify their effects.

AI. The aging of many economies is happening alongside the increasingly widespread adoption of generative AI. As a potential driver of GDP, the adoption of AI could balance out some of the impact of an aging workforce. On the other hand, it’s unclear how workers of varying ages and skills will be affected by potential displacement in certain fields.

Public policies. Policymakers can adjust immigration policies, labor market regulations, and investments in health care and education to address the challenges posed by an aging population. The largely inflationary effects of population aging (and other structural changes in the global economy) are likely to create a very different scenario from the past low-inflation decade for the Fed to address. Other policy challenges will revolve around health and social care and the funding of Social Security; these will likely result in public debates over levels of entitlement and benefits.

Supply and demand. The real-world impact of aging on inflation depends on the relative strength of a number of crosscurrents. While supply may fall (an inflationary effect) as the labor force shrinks, overall demand will probably decline (a disinflationary effect) as a rising share of the population retires, typically with lower income levels. Given that (full) retirement puts a (full) stop to an individual’s economic production but retirees only partially (if at all) reduce their demand, the net impact is likely to be inflationary. But it’s also important to note that the relationship between supply and demand varies by industry, and so may the effects on inflation.

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this website were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates, subsidiaries or divisions.