AARP Global Aging Program Idea Exchange Series
On November 30, 2005, Sandra Lawson, Vice-President and Senior Global Economist for Goldman Sachs, spoke at the AARP Global Aging Program’s Idea Exchange. Ms. Lawson discussed findings from the new Goldman Sachs’ report, “60 is the New 55: How the G7 Can Mitigate the Burden of Aging.” The report examines the impact of population aging on the workforce. According to Ms. Lawson, employment participation rates among older workers—‘making 60 the new 55’—would strengthen labor markets and boost GDP growth in the developed world.
Most global demographic research looks at the number of older people and their growing share of the population. However, Ms. Lawson’s work focuses on the working-age population (15-64). As a share of the total population, this crucial age group has already peaked in Japan, Germany and Italy and is set to peak in the US, UK and France in the next 5 years. Ms. Lawson explained, “This is a pretty hard demographic fact and there is not much you can do about it.”
Ms. Lawson explained that even though people can be encouraged to have more children, the fact is that children born today will not come into the workforce for at least the next 15-20 years. Countries may try to focus on immigration as a solution to the workforce crunch. However, previous Goldman Sachs studies have indicated that the number of immigrants needed to correct the demographic shift would be socially and politically difficult for most developed countries.
Countries need to make the most of what they have in regards to their population and workforce. Within the developed countries, workforce participation rates drop significantly after 55 and even more so after 60. But, according to Ms. Lawson, “as long as people are working, it doesn’t matter how old they are.” By increasing the retirement age over time, many of the demographic challenges will be addressed. However, if they are not addressed, the 55+ share of the population will continue to increase across the developed world and the working-age population will continue to shrink.
If employment participation rates are held constant at today’s levels, the US workforce will grow by only 10% over the next 20 years, well below the 18% growth in the total population. In France, Germany, Italy, and the UK together, the workforce will decline by 7 percent; it Japan will fall by 15 percent. However, if participation rates are increased through later retirement, the US workforce could grow by 17 percent, nearly keeping pace with population growth. In Europe, the workforce would actually grow by 5 percent—faster than the overall population. In Japan, the workforce would still decline, but by 9 percent rather than by 15 percent.
Stronger growth in the workforce could result in higher trend GDP growth over the next 20 years. Higher participation rates among older workers could boost US real GDP growth by 0.5 percent (to 2.8% from 2.3%). Trend growth in Europe could rise by 0.6 percent (to 2.2%) and in Japan by 0.3 percent (to 1.5%). Higher trend GDP growth yields higher per capita income: 11 percent higher than otherwise in the US, 12-16 percent higher in Europe and 7 percent higher in Japan. Ms. Lawson noted that the pickup in Europe is particularly interesting, because Europe’s demographic situation is considerably more challenging than that in the US. Europe has the most to gain by ‘making 60 the new 55’.
Participation rates among older workers have been tending upwards for about 15 years in the US, and there is evidence in recent years that this is happening in Europe as well. Important incentives to encourage people to work longer include a later retirement age, tax incentives for companies, lower tax rates for older workers, anti-discrimination laws and updated rules on flextime and flexible hiring.
Many of these solutions are underway in developed countries. The US has, for some time, barred age discrimination in the workforce and an EU directive will make age discrimination illegal in 2006. Italy has also introduced tax incentives to keep older workers in the workplace longer.
Without many of the changes outlined by Ms. Lawson, countries will continue to encounter many workforce challenges. Acting now and phasing in later retirement will keep much needed institutional knowledge within the workforce and reduce the burdens that that traditional retirement causes on economies. These changes will boost GDP and per capita income for countries.
Bio: Sandra Lawson is a Vice-President and Senior Global Economist for Goldman Sachs in New York. Her recent work has focused on demographics, capital markets, globalization and trade. She holds degrees from Yale Law School and Dartmouth College.
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