Thursday, October 05, 2006

FRB: Speech, Bernanke--The Coming Demographic Transition: Will We Treat Future Generations Fairly?--October 4, 2006

More on the changes that may be brought about by the retiring of the baby boom generation. This is from Fed Chairman Ben Bernanke.

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.

Some highlights:

"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.


Lord said...

Because there will be fewer workers, it is widely expected that Real GDP will decline.

That would be incorrect. The population is stablizing, not diminishing. Real GDP should continue to grow, but at the rate of productivity growth since population growth will slow. There will be proportionally more retired people, but that is the transition from a growing population to a stable one.

It may be the case that we will have to chose between working longer at lower tax rates or living longer in retirement with higher ones but I doubt most people will opt for the former. How many people do you know that love their jobs? This is about as fair as it gets. If you can plan on a longer retirement, you should expect to pay more for it.

Anonymous said...

I don't think that Social Security will be reduced, but Medicare will see changes. What I am curious about though is the effect on the economy if SS was cut..Obviuosly, this reduces our deficit from a funding standpoint, yet many seniors would no longer have dollars to spend. Few actually "bank" their Social Security. In my view, SS is money filtered right through retirees and going back into businesses and the economy. Reducing SS for the size of the boomers would severly reduce income going into the economoy.

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