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Birth rates have dropped faster than life expectancy has increased, causing slower population growth around the world. Forecasts from the United Nations predict that world population will actually decline after 2080. Slower population growth and even decline will not trigger economic catastrophe, but it will bring two economic challenges, one short-term and one long-term.

With falling population growth rates, we will see the dependency rate rise. This is the ratio of non-working people—children and elders—to the working population. Higher dependency rates present a general economic challenge as well as a specific problem for most government pension schemes. The long-term problem comes from a fact about innovation: a small number of people account for a large share of the ideas which improve our standard of living. With a smaller population, we may get fewer of those great ideas.

Population Slowdown And The Dependency Rate
 

Human beings have two dependencies: children and the elderly. Our species has an unusually long period of time between birth and productive ability. Some animals start finding food right away, but human children need to be taken care of for many years.

At the other end of life, human groups support older people. The wolf that is too old to hunt slowly starves to death. The caribou that cannot migrate to find good grazing becomes easy prey for the young wolf. But working humans usually provide support for older people.

The dependency problem arises in any group with falling population, regardless of government programs. But common government pension schemes, like U.S. Social Security, accentuate the problem. They rely on what is called the “pay as you go” plan, in which current workers pay for retirees. The Social Security system runs this way, though it contains the veneer of an employee savings plan. In reality, the trust fund is not a reservoir into which an employee pays when working, then draws upon when retired. Rather, it is like a river, into which workers pour money that is drawn out almost immediately by retirees. The water for today’s workers when they retire will have to be provided by future workers. But the number of retirees is growing faster than the number of workers. Over the last 10 years, the number of people collecting Social Security retirement benefits increased by 30%, but the number of employed people only increased by 14%.

Government pension plans can be adjusted to improve fiscal condition by changing payments into the system, pension amounts and retirement ages. More generally, rising dependency ratios can be addressed by longer working years. With rising life expectancy has also come longer healthy lives. Early improvement in life expectancy came from reducing childhood mortality. In years past, life expectancy for people who lived to age 18 showed little improvement. Old age infirmity still occurred in peoples’ 60s. Recent longevity gains, however, have expanded healthy older years. Many people choose to work longer years, partly because they are healthier and partly because much work is less strenuous. With slow growth of the population of traditional “working age", opportunities for older workers will abound.

Public policy could increase this trend through tax and benefit rules that encourage elders to work. This would conflict with old attitudes that jobs are scarce and workers plentiful. That outdated view led policy to encourage retirement. Now, however, our economy is labor constrained. The economy benefits from people working longer; we do not need to encourage retirement.

Longer term, scientific research could add emphasis to improving capabilities of older people. Extending life spans in general is valuable, but economic benefits come from helping people in their 60s, 70s and even 80s be able to work. We hope that the work would be by choice and not necessity, but either way it will help the overall economy.

Idea Development: One In A Million People
 

Human progress has come from better ideas. People invent tools for hunting and grinding food; the wheel to move goods from where they are abundant to where they are scarce; and modern technology to speed communication about new developments.

Everyone has ideas. Many people have contributed ideas that helped make a small gain in human welfare. But the big gains have come from a very small number of people. These are creative folks who can integrate what they know about the world with an understanding of what new approaches would help the world. These people are “one in a million.”

A great aspect for those of us who are not one in a million is that the benefits of their work diffuses throughout the economy, helping the rest of us. Nobel laureate economist William Nordhaus has estimated that successful entrepreneurs capture only 2.2% of the value they create, on average. They end up rich, but even if they don’t give away any of their wealth, the general population has enjoyed better products at lower prices. These entrepreneurs have not taken from the poor, but helped them. (It is possible for some entrepreneurs to use theft or government coercion to take from others, but that’s not the dominate practice.)

Simple arithmetic says that if we benefit from these one-in-a-million people, we would like to have more millions of people. Slower population growth and eventual population decline seems likely to slow down the rate of progress.

Happily, though, two factors, will offset the this. First, many of these potential ones-in-a-million have grown up in extreme poverty with little access to education and few entrepreneurial opportunities. Their talents have been wasted. But the World Bank reports, “Since 1990, more than 1 billion people have been lifted out of poverty.” The rise of capitalism and urbanization have helped provide more opportunities for extremely gifted and motivated people to fulfill their potential. The world will benefit for years to come from past improvements in opportunity.

The second factor helping to generate great ideas is artificial intelligence. Thomas Edison famously said "Genius is one percent inspiration, ninety-nine percent perspiration.” AI can help with many tedious, “perspiration tasks” that scientists and inventors face. It can screen potential combinations of chemicals, for instance, so that scientists try only those with the most promise. AI can search out non-obvious relationships in huge datasets. It can find applications for surprising research results.

This optimism is speculative, of course. The political, economic and cultural environment may change to discourage innovation, but as of this writing the recent trends are very positive.

Effects Of Future Population Slowing
 

Population slowdowns are already hurting some retirement systems. That’s a real problem that must be addressed beyond borrowing more money. But economies can grow through productivity rather than raw numbers. And nurturing our extremely productive people will help, in the long run, to increase our standard of living despite the eventual population decline.

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