A] Prelude
For more information on pension systems, risk and coverage, feel free to visit our dedicated webpages:
https://expatpensionholland.nl/usa-expat-pensions
https://expatpensionholland.nl/global-pillars-systems
https://expatpensionholland.nl/global-investments-risks-0
https://expatpensionholland.nl/global-social-security-coverage
B] The Issue
America is getting older. Between 1980 and 2022, the median age increased from 30 to 39. An older population will impact the country in a variety of ways, some more obvious than others. One likely yet underappreciated impact will be less entrepreneurship. A new study by Rui Zhang and Mengyao Kang finds that countries with higher shares of elderly people have fewer entrepreneurs and new businesses.
C] Details
The increase in America’s median age coincides with an increase in the proportion of the population that is over 65. In 1980, only about 10% of the U.S. population was 65 or older. In 2020, nearly 60 million people, or 17% of the population, was 65 or older.
This trend is not unique to America. As shown in the study, developed countries around the world are aging. Among OECD countries, the share of the elderly population increased from about 12% in 1990 to nearly 18% in 2020. Some of the implications of an older population are straightforward. Elderly people typically require more health care. This will put pressure on hospitals and nursing homes, especially in rural areas already facing shortages of medical workers.
An increase in retirees relative to workers also puts stress on entitlement programs such as Social Security and Medicare. In America, workers pay for the Social Security benefits of retirees. As the number of workers per retiree falls, each worker is on the hook for a larger portion of the benefit. In 1960, each Social Security recipient was supported by 5 workers on average. Now, each recipient is supported by about 2.8 workers and that number is projected to fall to roughly 2 by 2050!
D] Entrepreneurship
It is this retirement benefit liability that drives the decline in entrepreneurship found by Zhang and Kang. In their model, an aging society requires firms and workers to contribute more to pension systems via higher taxes. These higher taxes then discourage entrepreneurship.
Similarly, a higher pension replacement rate, which determines the amount of labor income a pension replaces in retirement, also discourages entrepreneurship. They tested these predictions using data from 31 countries and find support for their model. Both a larger proportion of people 65 and older and a higher pension replacement rate are associated with a smaller proportion of people becoming entrepreneurs. On average, a 10% increase in the share of the elderly population is associated with a 9% decrease in the share of the population that are entrepreneurs.
This is bad news for America but even worse news for other countries aging even faster, such as many East Asian countries. In a recent paper Nicholas Eberstadt argues that the Eastern Asian region, which includes China, Japan, North and South Korea, Taiwan, and Mongolia, is not only aging, but will soon experience population decline as deaths outnumber births and new migrants. He projects that Eastern Asia’s population will decline by 54% from 2020 to 2100 while the United States’s population will continue to grow by 24%, largely due to immigration. (A prediction known by our GOP friends?)
Eberstadt’s analysis paints a gloomy picture for China, Japan, and the other East Asian countries over the next 80 years. China has never been able to match America’s rate of entrepreneurship or dynamism due to its command-and-control economy, but in recent years it has fallen farther behind as President Xi Jinping tightens the communist party’s grip on the country’s businesses.
China is also much poorer on a per person basis than South Korea, Taiwan, and Japan—its per capita GDP is roughly 36% of the other three—so it will have a harder time supporting its large elderly population, especially with fewer entrepreneurs. The one-two punch of slower economic growth and a declining population may be more than China can handle.
E] Finally
The United States is in a much better position. Despite their problems, their economy remains the envy of the world. U.S. economic growth is outpacing other advanced economies: From the end of 2019 to the second quarter of 2024 U.S. real GDP grew by 8.7% compared to 1.9% in the European Union and -2.2% in Japan. This trend is likely to continue given the pro-growth tax and regulatory policies favored by the Trump administration.
America is also in the advantageous position of being able to combat low fertility rates with immigration. They have a long if somewhat mixed history of welcoming immigrants and routinely rank in the top three most attractive countries for college graduates. More immigration would also increase innovation and economic growth.
A new study by Marta Prato finds that doubling the size of the H1B visa program would increase U.S. economic growth by 4% in the long run by allowing more inventors to work in the United States where they are more productive. This would counteract the slowdown in economic growth caused by an older population.
If the US could secure their borders and reform their immigration system to allow more legal immigrants in who want to contribute to the economy then their population problem would be manageable. Absent immigration, researchers at the University of Pennsylvania predict that deaths will outnumber births by the mid-2030s and the U.S. population will slowly shrink.
Another way to slow the aging of their population is to build more housing. Housing prices are high nationwide: The median price to median income ratio is over four in metro areas across the country, a sign that housing is unaffordable for the typical family. And it turns out, perhaps unsurprisingly, that high housing prices that inhibit home ownership discourage people from having children. A recent study analyses a housing lottery program in Brazil. They find that for 20- to 25-year-olds who obtain a house via the lottery, the average probability of having a child increases by 32% and the number of children increases by 33%.
This means that if states pass policies that make it easier to build more housing, they could see more family formation and higher fertility rates. The impact would likely not be big enough to solve the population problem, but combined with more immigration it would certainly help.
Many people do not appreciate the negative impacts population decline will have on the economy; slower growth, less innovation, and strained safety net programs. Historically there were periods of population decline due to famines and plagues, but in modern times we take population growth for granted. But we cannot take it for granted anymore. Building more housing and increasing immigration are two ways which can alleviate the pending population problem.