America's Changing Demographics: A Looming Gray Tsunami?

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When the Second Continental Congress approved the Declaration of Independence on July 4, 1776, the average life expectancy of a white male living in the American Colonies was 35 years of age. 40% of children born that year died before reaching adulthood, mostly due to high rates of infant mortality or frequent epidemics, such as smallpox, both of which significantly lowered average life expectancy.

Unfortunately, similar life expectancy statistics are either lacking or unreliable for white females, indigenous Americans and people of color living during this Colonial period. However, for several of the signers of this revered document, their actual lifetimes far exceeded the average level of life expectancy: John Adams lived until age 90; Benjamin Franklin until age 84; and Thomas Jefferson until age 83.

In the intervening 243 years since the Congress met in Philadelphia, life expectancy by 2019 had risen to 79 years of age in the US, achieving an overall increase of 44 years. There are many reasons for this welcome upward trajectory in life expectancy: a dramatic drop in infant mortality; significant advancements in medical research and procedures; an expanding number of vaccines; greater access to healthcare; changes in diet and nutrition; healthier lifestyle choices; increased education; and an overall decrease in violent crime.

With life expectancy continuing to increase, it is important to highlight three resultant outcomes already set in motion: a dramatic shift in America’s demographics; a significant realignment of our economy’s workforce; and an increasing burden on the funding of Federal social benefit programs such as Medicare and Social Security.

Let’s begin by reviewing just one demographic effect of our longer-lived population. As shown in the graphic below, seniors (65+) were 8% of the total US population in 1950, the fifth year of the Baby Boom. By 2020, this cohort reached ~ 17% of the total population, and it is now projected to reach a level of 22% by 2050.

Source: Statista as of September 2020

Two demographic forces are dramatically increasing the senior proportion of our total population. The first, of course, is a continuing rise in overall life expectancy for all age cohorts. The second, equally important, is a significant decline in our nation’s fertility rate. This metric measures the total number of children, women aged 15-49 will bear in their lifetimes. If fewer children are being born, then the proportion of seniors in the total population will continue its increase.

The graphic below captures these two forces occurring together during the 1960-2019 time period. From 1960 onward, life expectancy rose from 70 to 79 years, or an increase of 13%. In contrast, the fertility rate during this same period fell from 3.7 children to 1.7 children, or a decline of 54%.

Source:  FRED as of June 2021

Demographers assume that a fertility rate of 2.1 children or higher is necessary to maintain a nation’s population at its current level, excluding immigration or emigration. America dropped below that rate in 2008, but it has continued to expand its population level through a combination of immigration and increased life expectancy.

For a stark example of how impactful a nation’s declining fertility rate may be on its future population numbers, Japan offers a very potent illustration. With its fertility rate having fallen below 2.1 children in 1974 and being only 1.3 today, Japan is projected to see its current population of 126 million decrease to just 97 million by 2050, or an overall decline of 23%.

With the number of live births falling each year since 2008, seniors are not only becoming a larger proportion of the US population, but they are growing faster in overall numbers than those of the working age population of 15-64 years. The age dependency ratio, which measures the number of seniors divided by the total working age population, has accelerated significantly since 1960. Then, the ratio was just 15%, but it has increased to 25% today.

While this rate of growth may not appear alarming, it needs to be viewed within the context that the number of workers supporting each Social Security recipient continues to decline. More specifically, the number of workers per Social Security recipient has fallen from 5.1 in 1960 to 2.6 in 2020, and it is projected to decline further to only 2.1 workers by 2050. As recipient payments are funded solely from taxes paid today by workers and their employers into the Social Security Trust Fund, a continuing decline in tax collections is projected to result in an inability of the Trust Fund to pay full benefits after 2034.

Unlike Social Security, Medicare benefits for seniors can no longer be funded fully from payroll taxes and premiums, but must rely on supplemental Federal payments too. Medicare spending alone now accounts for 21% of national healthcare spending, and consumes 14% of the total Federal budget. As shown in the graphic below, combined Medicare and Social Security payments totaled $1.9 trillion in 2020, or 40% of the total Federal budget. This payment level has risen from $620 billion in 2000, experiencing a 5.9% annual growth rate. Clearly, public policy and legislative changes will need to occur within each of these social benefit programs to support their growing payment levels.

Source: FRED as of June 2021

What decisions should both pre- and post-retirees consider today in light of potential shortfalls in these or other Federal programs? For example, while each individual’s case will be different, at what age might it be optimal to begin receiving Social Security payments? Which of the ten standardized Medigap plans, if any, should an individual consider purchasing to supplement Medicare coverage? Should an individual establish a Health Savings Account (HSA) or not before retirement to fund post-retirement medical expenses on a tax-free basis, such as Medicare premiums? Or, should a pre-retiree adjust a targeted retirement date to reflect new financial information?

Most importantly, a first decision is to assure that your financial plan fully reflects an accurate profile of your household’s income, assets and retirement goals, both current and projected. If your financial plan needs an update, or just to have an in-depth discussion of any of its assumptions, please contact your trusted professional at The Mather Group (TMG). There are many financial levers which may be identified, reviewed or even implemented now to support you in achieving your financially secure retirement goals.

Each of us, hopefully, has much to be thankful for during this celebratory week of July 4th, so many generations later since that historic day in Philadelphia. All of us at TMG continue to wish you a safe, healthy and enjoyable summer.



US Census Bureau; US Center for Disease Control and Prevention; Japanese Statistics Bureau; JSTOR; National Museum of the American Indian; US Office of Management and Budget; Peter G. Peterson Foundation; St. Louis Federal Reserve Bank (FRED); US Social Security Administration; Statista; Wikipedia; World Bank

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