Demographic winter

Bottom Line

As we approach the Memorial Day weekend here in the U.S., the critical fiscal-policy issues for voters surrounding the upcoming presidential election are coming into focus. They include border security and immigration; economic growth and inflation; and the federal debt and deficit—all interrelated. Will either candidate offer a statesmanlike approach, with thoughtful, common-sense solutions during the summer debates and conventions, to craft a winning hand come November?

Slow decline The total U.S. fertility rate plunged to a record low of 1.62 births per woman in 2023, well below the 1957 cycle peak of 3.77 and the replacement rate of 2.1. Furthermore, that’s a 2% decline from 2022 and the lowest rate on record since the Census Bureau started tracking this metric in the 1930s. It expects the rate to continue to decline.

There are many reasons for this, including people focusing on completing education and establishing their careers, marrying later in life and opting for smaller families. Less generous maternity benefits, a dearth of quality child-care options, the cost of home ownership and repaying student loans exacerbate this demographic dilemma.

How do we drive trendline GDP growth? Having enough workers to fill the new jobs an economy creates and the level of productivity growth are the principal drivers of generating sustainable 3% GDP growth. The U.S. population from 1900 to 2010 averaged a compound annual growth rate of 1.3% annually. But from 309 million in 2010 to 333 million in 2022, it slowed to 0.6%. Productivity from 1947 to today averaged 1.4% annually. Yet in the first quarter of 2024, it slowed to a tepid rate of only 0.3%. 

We expect the nascent surge in the use of AI to boost productivity over time. But to offset the sharp decline in our organic fertility rate and fill the new jobs that the U.S. economy is creating, we need to expand safe, legal immigration and to increase the hiring of both skilled and unskilled foreign workers. They would keep the economy humming and have the added benefit of paying taxes into our rapidly depleting Social Security Trust fund. 

Immigrant workers fill a need They occupy many of the difficult jobs that most native-born Americans simply do not want to do, such as in agriculture, food-processing plants, restaurants and hotels, child- and elder-care, housekeeping, landscaping and construction. If these low skilled jobs went unfilled, economic growth would slow. Moreover, some native-born Americans also suffer from a skills mismatch, and well-educated foreign workers have been filling high-skilled positions. In fact, three-quarters of the candidates for master’s and Ph.D.’s in STEM majors at U.S. universities are international students (46% of them from India and China), but we typically deport them after graduation.

An open southern border is not the solution According to the U.S. Border Patrol, some eight million illegal immigrants have streamed across the southern border over the past three years through the first quarter. That places enormous budgetary pressure on the cities in which they settle, as governments are faced with the daunting financial responsibility of feeding, housing, transporting, educating and providing health care services for these families. Our first step is that we need to secure the southern border.

Some undocumented immigrants have sought paid employment to support their families, either on the books or under the table. According to the Labor Department, the number of foreign-born workers (16 years of age and older) has increased over the past year by 520,000 through April 2024, establishing a worker participation rate of 66.0%. But the number of native-born workers has declined by 5,000 over this period, with a participation rate of 61.7%. The overall participation rate in the U.S. economy was 62.7% in April. 

Slow cash burn Earlier this month, the Social Security Board of Trustees announced in their annual 2024 report that the Social Security’s trust fund will be fully depleted by 2035. So, benefits will be automatically cut by an estimated 17-25%, affecting 71 million Americans. In our view, Washington’s current ostrich-like approach to ignore the problem—rather than institute shared sacrifice and much-needed reform—is completely inappropriate. 

The problem is we’re living longer President Franklin Delano Roosevelt signed the Social Security Act into law on August 14, 1935, providing financial support for the elderly and disabled. He knowingly established the Social Security program with a 40-1 worker-to-retiree ratio—for every 40 people who were working full time and contributing their taxes into the system, one person successfully lived until age 65 to begin to draw full benefits. The average American died at 62 years of age at that time.

Fast forward nearly four generations. We’re enjoying advanced medical care, better nutrition, and more exercise, resulting in improved health. Life expectancy at birth has soared 32% to 82 years pre-Covid. But the full retirement age is only 3% higher today at 67. So, the worker-to-retiree ratio has shrunk to 3-1, and is on its way to an estimated 2-1 a generation from now. 

Multi-prong approach needed There have been attempts to reform Social Security, only one of which—the Greenspan Commission in the 1980s—was successful. To improve the solvency of Social Security for the next 75 years, we believe that Washington should phase in shared sacrifice with a half-dozen reforms: 

• Increase and index the retirement age Raise the retirement age to 70 by 2040, and then index the full retirement age to future changes in life expectancy. People who are 50 or older now would be grandfathered. We could narrow an estimated 14% of the long-term actuarial deficit by raising the retirement age by one year to 68, so an increase to 70 could eliminate an estimated 43% of the deficit. 
• Increase tax rates and the wage cap Social Security is funded with a 12.4% payroll tax (paid half each by the employee and the employer) on wages up to the taxable earnings cap, which increased by 5.2% this year to $168,600. This wage cap, which has risen 42% over the past 10 years, is subject to an automatic annual adjustment, based on increases in the national average wage index. 
• Fix the inflation calculation Cost-of-living adjustments (COLAs) are made with the current-dollar CPI, which economists believe overstates inflation by a quarter-point annually, compared with the chained price-index CPI. Using the former method to figure out how wage benefits are adjusted could fix an estimated 20% of the Social Security trust fund deficit. The COLA adjustment rose 3.2% in January 2024, compared with 8.7% in January 2023 and 5.9% in January 2022, due to the worst inflation in the U.S. economy in 40 years. 
• Means testing benefits We’re not sure at what wealth level to draw the line, but it’s clear that titans such as Bill Gates, Warren Buffet and Mike Bloomberg, among others, don’t need a monthly check from Social Security. 
• Generate better returns on trust assets Although he couldn’t get his proposal through Congress, President Bush had the right idea. A traditional 60/40 portfolio mix with Blue Chip dividend stocks and Treasury bonds generated a 7% annual return over the past century, well above the negligible returns generated by the Treasury Department. 
• Expand legal immigration Given our demographic challenges, expanding legal immigration would increase our pool of workers, boosting GDP and contributing to the Social Security trust fund through their tax payments. 

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