WEST CHESTER, PA. (TheStreet) -- Analysis of economic data suggest that an aging population could have a significant, negative effect on employment growth -- as much as half a percentage point per year. (Read More: What should policymakers do about it?)
The oldest baby boomers started reaching age 65 in 2011, and the youngest will do so in 2029. As a result, the percentage of the U.S. population in retirement age is going to increase significantly in the future. Between now and 2030, Moody's Analytics forecasts that the senior share of the U.S. population will increase by five percentage points.
A simple glance at the data suggests a troubling relationship between this trend and employment growth. Metro areas with a higher share of the population aged 65 and older in 2007 had slower job growth from 2007 to 2013.
An older population can slow employment growth in a variety of ways. It can mean higher taxes, as fewer workers are paying taxes to support more people who are dependent on government. It can also mean lower levels of entrepreneurship, which some research has suggested falls with an aging population. (Read More: Detailed analysis of employment in the U.S.)
That said, the connection between an aging population and slow growth could be spurious. For example, older residents may be attracted to warmer areas of the country, where their share of the population may grow as demand weakens for industries that tend to cluster in warmer areas, like tourism and agriculture. Or, older residents may disproportionately locate in small cities, which are growing more slowly due to the increased popularity of big city amenities.
To rule out some alternative explanations for why older metro economies are growing slower, regression analysis can be used. Importantly, regression can focus on the variation in metro differences within states, which ensures that state-level factors-which would include weather, state fiscal conditions, and differences in industries between states-are excluded from the analysis.
This analysis, using 366 metro areas and employment growth from 2007 to 2013, suggests that metro areas with more senior citizens than average have lower growth than other metro areas in the same state, even after controlling for population size. Specifically, a one percentage point increase in the share of residents age 65 and over reduces the annual employment growth rate by 0.1 percentage points going forward. (Read More: Detailed analysis of U.S. economy, region-by-region.)
The results from this analysis suggest that the aging that will occur between now and 2030 will lower job growth by half a percentage point per year. If the true impact is even a fraction of this size, it will be economically significant. Indeed, after the economy fully recovers from the current slack, job growth is generally expected to be between 0.5% and 1% per year over the next two decades.
For this reason -- and many others -- an aging population is one of the most important transformations the U.S. is undergoing right now. How an older population affects the economy is not studied enough, and so our understanding of aging's impact, and what to expect for the future, is limited. Proving that older populations are truly causing slow growth requires more in-depth research, but these results are suggestive enough and large enough to worry about and motivate further study.
While more research is needed, the impact is highly plausible. A higher dependency ratio by itself -- that is, the number of people depending on social security and other benefits versus the number of people paying into the coffers that fund these benefits -- will have a dampening impact on growth by requiring more taxes per worker.
One way for policymakers to address the problem would be to allow more immigration. On average, immigrants are younger than U.S. residents. This means that increasing the number that we allow to move here will decrease the share of the population that is age 65 or over.
Other policy options include increasing incentives for individuals to work longer, like lifting the social security benefit age. However, this is complicated by not knowing the exact mechanism through which aging effects growth. In addition, it requires putting a greater burden on older Americans. (Read More: What the new Congress should do to spur employment.)
As the country continues to age, signs of strain are likely to grow more apparent. From an economics standpoint, acting early is always easier than acting later. The the effect that the aging of the population will have on the economy deserves more attention from policymakers and researchers.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.