FRB: Speech, Bernanke--The Coming Demographic Transition: Will We Treat Future Generations Fairly?--October 4, 2006:
Short version: increase savings to increase productivity. And rely on FinanceProfessors to save the day ;) Ok, so maybe that was added.
"In coming decades, many forces will shape our economy and our society, but in all likelihood no single factor will have as pervasive an effect as the aging of our population."
"The fiscal consequences of these trends are large and unavoidable. As the population ages, the nation will have to choose among higher taxes, less non-entitlement spending, a reduction in outlays for entitlement programs, a sharply higher budget deficit, or some combination thereof."* Because there will be fewer workers, it is widely expected that Real GDP will decline. Bernanke suggest this problem can be lessened with higher investment now:
"Although some adverse effect of population aging on future per capita output and consumption is probably inevitable, actions that we take today....have the potential to mitigate those effects. One such action would be to find ways to increase our national saving rate. If the extra savings were used to increase the nation's capital stock--the quantity of plant and equipment available for use by workers--then future workers would be more productive, ameliorating the anticipated effects on per capita output and consumption."This could be done by lowering deficits:
"If, as a nation, we were to accept the premise that the baby-boom generation should share at least some of the burden of population aging, what policy steps might be implied? As I have already noted, from a broad economic perspective, the most useful actions are likely to be those that promote national saving. Perhaps the most straightforward way to raise national saving--although not a politically easy one--is to reduce the government's current and projected budget deficits. "* This would almost assuredly involve reducing entitlement programs:
"Reform of our unsustainable entitlement programs should also be a priority. "* And convincing consumers to save more now:
"Increasing private saving, which is the saving of both the corporate sector and the household sector, is likewise desirable.... Unfortunately, many years of concentrated attention on this issue by policymakers and economists have failed to uncover a silver bullet for increasing household saving. One promising area that deserves more attention is financial education.... which may be useful in helping people understand the importance of saving and to learn about alternative saving vehicles. "See I told you that FinanceProfessors would come to the rescue!!!!
Save early, save often! Pass it on.