Last week I discussed Japan's lost decades, and how the underlying cause of their recession is that a larger proportion of economic output is being taken by retirees, leaving less to be provided as pay and thus as incentives for those not yet retired to work.
This effect hit Japan starting in 1990 because they had substantial population increases before and to some extent during World War II, unlike the U.S. The U.S. did, however, have a "baby boom" following World War II. Those baby boomers are just starting to retire now, and will continue to do so through 2030.
That means that a similar dynamic will be affecting the U.S. over the coming two decades as have affected Japan for the last two decades. For reasons discussed last week, the specifics will be different: we're likely to see inflation rather than deflation, with wage increases lagging behind inflation, and indeed we're already seeing that. The ultimate effect will be the same, though: inflation adjusted wages will drop and employment rates will fall.
This problem is exacerbated in the U.S. because retirees have been joined by increasing numbers of people on social security disability, which is also protected by inflation, as well as increasing numbers of people collecting unemployment insurance due to extension of unemployment benefits from a few months to two years. In the long run those effects are smaller than the demographic effects of retiring boomers; however, institution of those changes in the past few years have caused our lost decades to hit rather suddenly, rather than more gradually over this decade as would otherwise have occurred.
We can now expect decades of economic stagnation unless we find a way to reduce the amount to be paid out in benefits, or increase the amount being paid to the work force, or both.
With respect to reducing expected benefits payments, enacting some of the current budget cutting proposals would help, in particular Republican House "budget cutting" proposals to temper the rate of increase in medicare expenditures. Moving to a slower inflation adjustment for social security and reducing other government benefits would also help. In addition, we need to reverse the recent moves towards more lenient disability and overgenerous unemployment benefits.
With respect to increasing the amount being paid to the work force, the simplest solution is to increase the size of the work force. In addition to returning to more realistic levels of unemployment benefits, encouraging people to delay retirement and stay in the work force would be an effective way to do this.
Ironically, another Republican House "budget cutting" proposal would actually be counterproductive in this respect - specifically, the proposal to means test social security. Means testing of social security would encourage people to retire, rather than to continue to work and lose social security benefits. We need for productive people to keep working, so as to increase the size of the pie that can be divided between retirees and workers; because of that, we need to avoid encouraging people to retire when they can still work.
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