As the U.S. population continues to age and the workforce lags behind what’s needed to support the growing elderly population, Tepper School experts and alumni share perspectives on how to respond.
The Who famously sang, “Hope I die before I get old,” as a new generation pushed its way past the previous one. The song still resonates as an anthem of rebellion. But as a marker of human history, it missed the beat. We haven’t died young, or even in late middle age as was once the case. Instead, with advancements in medicine and gains in household wealth, people are living longer than ever before.
That is a good thing, especially for those who are a part of the growing geriatric generation. But it’s not all laughter and leisure. The hard truth is that the emerging younger generations are not large enough to support those in their golden years, power vital economies and provide new ideas for old problems.
The problematic consequences of this aging world have been bubbling for decades. Addressing the ramifications of serious generational gaps brings to light difficult economic, legislative, health care and societal frustrations with which to contend. The problems are likely to get worse before they get even a little better.
A few policies could begin increasing the size of the workforce: Incentivizing older workers to remain active in the workforce longer lengthens the time they contribute to the economy. Likewise, increasing access to child care both encourages women to return to work sooner after childbirth and may boost the populations of future generations.
However, these options will only partially address the looming crisis. Younger workers are not becoming skilled tradespeople — such as mechanics or carpenters — at the same rate as in previous generations. “People heading into the trades are decreasing,” said Julie Murphy, MSIA ’91, vice president and chief human resources officer for Tradesmen International, which recruits skilled workers for large construction companies on a per-project basis. “High schools are gearing students to be college-ready and downplaying trades.”
Lori Heinel, MSIA ’92, deputy global chief investment officer for State Street Global Advisors, which tracks a number of metrics across nations, notes that while the female labor participation rate in the United States is currently rising, it is not increasing enough to offset the drop in male participation. Also, the female workforce produces less, because many women work in service jobs, which pay lower salaries than manufacturing. In recent years, male-dominated industries like manufacturing have seen significant growth in productivity without a concurrent increase in labor, as innovations in technology have replaced labor costs: The machines boost profits but don’t pay Social Security taxes.
From a macroeconomic perspective, economies grow with increases in labor, capital and productivity. “The major problem with aging demographics is the labor factor can no longer be a factor of growth,” said Sevin Yeltekin, professor of economics, senior associate dean of education. “There is a question of how much you can add with capital. So the only thing left on the table is innovation. But innovation and labor are positively correlated — innovation comes more from younger workers.”
By the numbers
Humanity is rapidly aging, which has dramatic implications for the U.S. and world economies. According to a United Nations report, the proportion of people age 60 or older is projected to more than double over the next 50 years. Over that time in the developed world, more than one in three people will be 60 or older, with one in four over 65. The developing world is barely younger, where one in five is projected to be more than 60 years of age. In the U.S., the percentage of people 60 or older will grow from about 16 percent of the population to approximately 27 percent during those same 50 years.
Populations at more advanced ages are rising, too. Heinel says the population of those 80 years old or older is growing rapidly. In Japan, for example, the 80-plus segment was at about 1 percent in 1970 but is now at about 8 percent — the oldest in the world. France, Italy and Germany, all at roughly 2 percent in 1970, are at 6, 6 and 7 percent, respectively. The U.S. 80-plus population is at 4 percent — healthier than those in other developed countries, but getting older.
Yeltekin often tells her students that demography has sharp teeth. “We can’t just bury our heads in the ground and say demography isn’t coming to bite us — it is coming to bite us, very soon,” she said. As currently funded, the trust fund financing the main Social Security program — Old Age and Survivors Insurance — is forecast to run out of money in 2035, just 18 years from now. Disability Insurance runs out even sooner, in 2023.
The fact that more people are living into older age isn’t the core issue: The problem is, fewer babies are being born, especially in established, western-style economies, to support the economic necessities of the elderly. As a national income rises and the nation becomes wealthier, its birth rate declines. Birth rates in the U.S. have fallen to 1.84 births per woman, with 2.1 births per woman considered by demographers to be the minimum for ideal population replacement.
“It’s the mother of all bombs — it’s bad,” Yeltekin said. “We’re doing a lot of myopic stuff. It is part of, unfortunately, the political process.” And that is the crux of the issue of an aging economy: Short-sighted, ongoing legislative actions do not address the underlying long-term effects of the demographic shift.
“Ultimately, what we are trying to get at is: What’s the long-term growth potential of an economy?” Heinel said. “Since growth rate is a function of labor and productivity growth, the demographic question becomes a real headwind.” For a harrowing glimpse at what the future could hold, she notes that Japan has borrowed so much to support benefits to its elder class that the country would have difficulty stimulating demand during an economic slowdown.
Aging consumer base
Businesses, which often move faster to address societal shifts than government, are already changing the ways they interact with both employees and consumers. “But I still think that it’s hard to understand what aging will be like until you are there,” said Mildred Myers, teaching professor of business management communication emerita, who wrote a guide some 20 years ago for the American Bankers Association to help managers re-engineer banks for the nation’s growing population of seniors.
“Businesses need to go beyond lip service and genuinely understand how older people will increasingly play a role in their firms’ successes or failures,” Myers said. “There are many of us; we have money and are willing to spend it.” A significant part of business innovation will be formed around the needs and desires of older people, who won’t necessarily be considered “elderly” as medical advancements and lifestyle changes help people stay healthier over a longer period.
To accommodate these changes, businesses should carefully plan their investments over the next 20 years or so, adding capacity — more hotel rooms and resort activities, more and better medical devices and services — for the age bubble, but with an eye also to repurposing what they build as slowing birth rates inevitably yield a lower proportion of seniors, says Peter Boatwright, Allan D. Shocker Professor of Marketing and New Product Development, co-director of the Integrated Innovation Institute. But the idea that businesses should plan doesn’t mean they ultimately will, Boatwright says, as businesses typically pay more attention to short-term profits than long-term planning.
A better approach? Innovate incrementally, says Boatwright, by way of introducing new products or services feature by feature, building next year upon what was produced in prior years. It’s cheaper, and the learning curve for workers and consumers is not as steep, but it produces dramatic results. “Incremental is typically used as a negative when talking about innovation, because it is contrasted with the breakthrough, with disrupting the market,” Boatwright said. “Yet incremental change can be profound. Think about Amazon: They started with books and little by little ... There’s a lot of money in little by little. It’s just not as newsworthy.”
One example is self-driving vehicles. We may be decades away from a commercially viable self-driving machine, but we already have vehicles that sense lane changes and proximity to other vehicles or pedestrians. Soon, vehicles will be communicating with each other, warning about impending stops and starts. Next-gen products may be virtual trains, where vehicles are virtually linked into trackless trains, greatly increasing the efficiency of daily commutes.
Innovation is an argument for boosting productivity, and higher productivity helps to support an aging population. But economists point out that there may be limits to what innovation can do to dig the country out of its demographic hole, with fewer workers to support a growing elderly population.
Scarcity of labor
One way companies can address this trend is to encourage older employees to delay retirement. Aurobind Satpathy, MSIA ’96, senior partner in McKinsey & Company’s Chicago office, helps his clients rethink how to support older workers who still want to work — and whose work is sorely needed — but who are looking for a different set of challenges compared with when they were climbing the career ladder. “I don’t think as a society that we have a set of institutions to help people make mid-career changes. If we can do this, I think we’ll see happier people, more productive people and more productive economies as a result.” (See sidebar: “Making Work ‘Stickier’ for Late Career Workers.”)
The thinning of the American workforce is further exacerbated by the decreasing birth rate. Even as the education system drives young adults away from the trades, fewer people reach the working age each year. “This is a trend you haven’t seen for decades,” Satpathy said. “The pinch is most pronounced in lower and middle management levels.”
Still, Satpathy believes the U.S. is better positioned than most countries to weather the graying of its economy. “As I sit here, is a graying workforce an issue? Yes. Is it an issue where the U.S. is the most exposed? I would say no.” Where fewer young Americans are aging into the workforce, particularly as skilled tradespeople, immigrants have come in to fill such roles. “Not only do we have a vibrant immigrant community with, on the one hand, people wanting to move to the U.S., but on other hand, we have professional and community structures that allow people who have come even very recently to be assimilated fairly quickly. This is a huge asset.”
Satpathy is not overly concerned by recent controversy about immigration, which he sees as more transitory than intransigent. “If we should turn the tap off, would I be concerned? Yes,” he said. “But I don’t think this is going to happen. There are tens of millions of people already here that have assimilated; these are millions of data points in action.” (See sidebar, “Take the Sting out of Immigration.”)
Even if immigration is an American asset, the United Nations 2015 report on world aging says that U.S. immigration would have to be much larger and more sustained than current levels to slow or reverse the aging of its economy. At current and projected immigration rates, the U.N. estimates the U.S. will reduce the percentage of its population over 60 by just 1.1 percent. If the economy is to support seniors with existing programs, let alone bolster the safety net, it needs more workers in the economy.
The U.S. economy is chugging along at rather comfortable 2.5 percent annual growth, high enough to mask the deeper turbulence of its aging population. But unless the U.S. is ready to enact a slew of policy changes that encourage people to work longer, pay higher taxes and accept reduced benefits, increasing productive immigration may be the simplest and quickest way to stimulate economic growth.
“Why would we want to become Japan?” Yeltekin posed. “The more people you bring in at a younger age, they develop skills, they develop networks, and the next generation has the same or better opportunities. That’s what you want. You don’t want to come into this game really late to try to carve out a little piece for yourself in this global labor market.
Read More About Taking the Sting Out of Immigration. . .
If immigration is among the key strategies for boosting economic growth, government must help make sure U.S.-born workers don’t feel threatened.
“The idea that there is a vacancy out there and somehow we’re nudging a native-born American out to fill it with an immigrant is inaccurate,” said Sevin Yeltekin, professor of economics, senior associate dean of education “That’s not how labor markets work.”
Immigrants are attracted by economic opportunities that don’t exist in their native countries — even if the jobs are relatively low-paying by U.S. standards, Yeltekin said, adding that you might get U.S. workers to do that work, but only by raising wages beyond what the market might set. “Then, everything we buy from food to apparel to services would be more expensive, so we would lose out,” Yeltekin said.
Even so, U.S.-born workers struggling to adapt in the global economy should get more help to retrain and relocate if necessary, Yeltekin said.
Immigrants also contribute at higher skill and education levels, and that too is good for the economy. It takes a lot for a person to uproot themselves and their family to move across continents or oceans, whether it’s to work construction or coding.
“Policies that promote labor mobility generally are good,” said Lori Heinel, MSIA ’92, deputy global chief investment officer for State Street Global Advisors. “They may not feel good, but we don’t have enough skilled workers to fill all the positions we have open. If population grows more slowly than replacement, immigration is a good thing.”
Read More About Making Work ‘Stickier’ for Late Career Workers. . .
Just because the U.S. workforce is aging, it doesn’t mean older workers can’t make a meaningful contribution on the job and help staff an economy looking for more labor. Workers will retire if either their marginal contribution gets too low or their marginal cost gets too high, Laurence Ales, associate professor of economics, says.
Ales suggests the government can help move the line by rethinking rules that define full- and part-time work, wages and insurance. “We have that flexibility for youth — teenagers at Kennywood [an amusement park in the Pittsburgh area], for example, have an exemption on the minimum wage. Why not for older workers?” Ales suggested. “Government can help with lifelong wellness and training. Maybe Medicare should come earlier (than age 65) to provide incentives and help workers stay healthier longer.”
“Sixty is the new 45,” said Aurobind Satpathy, MSIA ’96 and senior partner in McKinsey & Company’s Chicago office.
“The reality is people are living much longer, they’re working much longer and they are healthier longer,” Satpathy said. Also, people want different chapters to their career. If we can as a society help people in these social deflections of their career, we’ll get more productive years.”
Older workers are also more likely to be easier to manage, according to AARP, a nonprofit serving Americans over the age of 50. They show more patience and cooperation than younger workers who feel they still have to prove themselves.
Monster offers these strategies for making older workers feel more welcome:
• Partner with organizations that support older workers
• Tell older workers you value their input and want them to stay
• Offer flexible schedules and benefits
• Continue to offer training and educational opportunities
Monster also suggests phasing retirement in slowly, allowing employees to gradually reduce hours while still contributing expertise and transferring institutional knowledge to the next generation.
by Geof Becker