Tuesday, July 24, 2012

Demographics matter for debt and health crisis

 A recent editorial in the WSJ "What's really behind the entitlement crisis?" by Ben Wattenberg focused on demographics as the root cause of the entitlement debt crisis. Entitlements are where the real risks of a debt crisis not core government expenditures.

Whether social security or health care, the US would be better off if there were more young people. A higher birth rate would help offset the growing demographic problem. This is the same problem facing the EU, Japan and China. An aging population that needs services can only be helped with birth rates which are at or above replacement ( a birth rate of 2.1%).

Social security is ponzi scheme that needs workers to support the system. If the number of workers declines, the workers per retiree will increase and funding will not be available except through increasing taxes. Young workers also are needed to pay for health care. More workers are needed to fund pensions. If there are less workers, the aging population will not be able to be supported.  Pro-natal policies are necessary for a the long run. The other alternative is a higher productivity rate which is not always easy to change.

Higher birth rates will not solve the problem anytime soon, but it is necessary to provide an equilibrium and avoid the long-term fiscal cliff. .   

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