LTC Bullet:  America's Demographic Winter

Friday, July 10, 2015

Contoocook, New Hampshire—

LTC Bullet:  The age wave isn’t our only problem.  A receding population tide is just as serious.  Details after the ***news.***

*** TODAY'S LTC BULLET is sponsored by Claude Thau, a GA whose proprietary tools help advisors find clients and reduce the “Ping-Pong” in the LTCi sales process. Help clients make informed final decisions about buying LTCi in 15-20 minutes!  Gauge a client's true interest in a combo product immediately!  Change work-site LTCi sales from a series of proposal deliveries to a single interactive consultation!  Claude is the lead author of the Milliman Broker World LTCi Survey, one of Senior Market Advisor's 10 "Power People" in LTCi in 2007, a past Chair of the Center for Long-Term Care Financing. Test Claude by calling 800-999-3026, x2241 or email him at claudet@targetins.com to ask questions or get references. ***

*** THE GRANITE STATE is where I remain conducting interviews for our study of Medicaid and long-term care financing in New Hampshire.  We described this project in LTC Bullet:  Should Presidential Hopefuls Address Long-Term Care?  As you read today’s LTC Bullet you’ll see why the demographic challenges America faces are especially acute here.  I’ll be writing our report in August for publication in September following which we’ll do a conference, publicity and outreach to the presidential candidates. ***

***  AALTCI’S SALES SUMMIT will be a FREE one-day event this year on October 27, 2015 at the Hyatt Hotel at Dulles Airport, near Washington, D.C.  Attend in person or catch the program online.  All free of charge.  Get all the details here. ***

 

LTC BULLET:  AMERICA'S DEMOGRAPHIC WINTER

LTC Comment:  Population aging is a problem we deal with frequently in this space.  It’s important to recognize, however, that the phenomenon sometimes referred to as the “birth dearth” is equally important and for many of the same reasons.

Fewer children being born now has consequences later on.  We won’t have the same “bench” of workers to provide the long-term care services that surging numbers of aging boomers will require.  Nor will there be as many employees to pay the skyrocketing income and payroll taxes that government will need to finance ongoing entitlement programs and their growing unfunded liabilities.

So today, we point you to some fascinating information provided in the following article by our colleague Scott Moody of State Budget Solutions (SMS).  Scott and SMS are collaborating with me and the Center for Long-Term Care Reform on the study of Medicaid and LTC financing in New Hampshire mentioned above. 

 

"America's Demographic Winter" (from http://www.keypolicydata.com/demographics/)  
by
J. Scott Moody

Demographics is Destiny!

In the policy world, demographics is far beyond the time-horizons of politicians. Politics is played out in 2-year cycles, but demographic trends can take decades to play out. Today, America stands on the precipice of an unprecedented demographic event which has been termed “demographic winter.”

Demographic winter is mostly the result of plummeting birth rates and, to a lesser degree, the aging of the baby boom generation. The aging impact on America’s population has been offset by longer life-spans, but a baby never born has exponential ripple effects on the size of the future population. As a result of too few babies being born, many parts of America will experience a shrinking working-age population and eventually shrinking overall populations.

America is not alone. Countries like Japan, Russia, and many others in Europe are already facing shrinking populations. As we will discuss, this will create a drag on economic growth at a time when many social programs will experience tremendous increases in demand. Will future generations, fewer in number, acquiesce to the financial demands of older generations? Ready or not, we will find out.

Net Natural Population Growth

So, the place to start is to examine “net natural population” growth which is the number of births minus the number of deaths that take place in a given jurisdiction. In 2014, there were 1.4 million more births than deaths [in the U.S.] which sounds impressive. However, since 1991 the change in net natural population growth declined by -32 percent to 1.4 million from 2 million.

In stark contrast, America’s population over the same time-period increased by 26 percent to 319 million from 250 million. As such, net natural population growth is contributing less and less to the overall growth in America’s population. In fact, as a percent of population, net natural population growth has declined to 0.43 percent in 2014 from 0.79 percent in 1991—a decline of 46 percent!

Of course there is a large variation among the 50 states. There are currently two states, Maine and West Virginia, where there are more deaths than births which means net natural population growth is negative. States that have also seen large drops in the rate of natural population growth include New Hampshire (-85 percent), Vermont (-81 percent), and Rhode Island (-76 percent).  [Emphasis added.]

On the brighter side, North Dakota has seen an increase in its net natural population growth (16 percent) and Nebraska is exactly level (0 percent). Beyond these two states, net natural population growth has fallen though not nearly to the extremes cited above—South Dakota (-2 percent), Kansas (-15 percent), and Iowa (-18 percent).

To better understand what is going on, let’s now look at the components of net natural population growth—births and deaths.

Births

There has been a decline in the absolute numbers of births between 1991 and 2014 of 175,688 to 3.96 million births from 4.13 million—this is a -4.3 percent decline. Yet, as a percent of population, the drop is a steeper -24 percent to 1.24 percent in 2014 from 1.63 percent in 1991 because the decline in births is set against the backdrop of an overall increase in America’s population.

Only a single state—North Dakota—has escaped this dramatic fall in the number of births with an increase of 1.9 percent to 1.46 percent of the state’s population from 1.43 percent in 1991. This is likely due to the boom in hydraulic fracturing which has brought a younger and more fertile population to the state. Of course, with a small population of only 638,817 it doesn’t take many births to move the needle.

On the other hand, there are states with more dramatic drops in the number of births as a percent of the population including: New Hampshire (-39 percent), California (-35 percent), Vermont (-34 percent), Connecticut (-32 percent), and Maine (-31 percent).  [Emphasis added.]

Deaths

In stark contrast, there has been an increase in the absolute number of deaths in America between 1991 and 2014 of 455,090—this is a 21 percent increase. However, the absolute increase in deaths has actually lagged behind the overall growth in population. As a percent of population, deaths have fallen by -3.8 percent to 0.81 percent in 2014 from 0.85 percent in 1991.

The states that have seen the greatest increase in deaths as a percent of the population include: Alaska (52 percent), Hawaii (34 percent), and New Mexico (17 percent). On the other hand, the states that have seen the great decrease in deaths as a percent of the population include: Nebraska (-15 percent), New York (-15 percent), and South Dakota (-12 percent).

Conclusion on Net Natural Population Growth

Despite the aging of the Baby Boom generation, deaths are not (yet) to blame for America’s downshifting net natural population growth. For now, the increase in life-spans has forestalled a more dramatic rise in deaths as a percent of the population.

The blame for America’s reduced net natural population growth falls on the reduction in the number of births in both absolute terms and as a percent of the population. There are many factors that have brought this about such as contraception, abortion, delayed marriage, the decline in religion, and the rise of two-income households.

More troubling, as Baby Boomers continue to age the number of deaths is only going to continue to rise. If the decline in births does not reverse itself, many states will soon face the prospect of declining overall population without an influx of domestic or international migrants.

Net International Migration

At the national level, there is only one form of migration and that is international migration. Between 1991 and 2014, there has been an influx of 23.7 million legal immigrants—an average of 985,671 per year. The states with the greatest number of immigrants in 2014 are: California (161,318), Florida (112,306), and New York (118,799). The states with the fewest number of immigrants in 2014 are: Montana (766), Vermont (719), and Wyoming (485).

While the absolute level of international migration looks large, it only averaged 0.34 percent of the population during this time-period. Of course, this varies by state. The states with the highest level of immigration as a percent of population in 2014 are: Hawaii (0.61 percent), New York (0.6 percent), and New Jersey (0.58 percent). The states with the lowest level of immigration as a percent of population in 2014 are: West Virginia (0.06 percent), Montana (0.07 percent), and Mississippi (0.08 percent).

Net Domestic Migration

Net domestic migration measures the movement of people from one state to another. At the national level, these movements cancel each other out. However, for specific states domestic migration can significantly add or subtract population.

Between 1991 and 2014, the big winners of domestic migration include: Florida (2,825,189), Texas (2,097,396), and Arizona (1,442,367). The big losers of domestic migration include: New York (-4,144,561), California (3,875,727), and Illinois (1,580,939).

Also, it should be noted that some unknown amount of domestic migration is disguised international immigration. States like New York and California are major gateway destinations for international immigrants, but they don’t always stay for long. If they soon migrate to another state, they are classified as domestic migrants and not as international immigrants.

However, as a percent of population, the picture of net domestic migration changes significantly. The states with the greatest domestic migration as percent of population (averaged over the time-period) were: Nevada (1.9 percent), Arizona (1.2 percent), and Idaho (0.9 percent). The states with the lowest domestic migration as a percent of population were: New York (0.9 percent), Illinois (0.5 percent), and Rhode Island (0.5 percent).

The Economic Costs of Demographic Winter

Economically, for the business community, Demographic Winter will be akin to a slow-moving economic depression by moving from population growth to population decline.  With a growing population, businesses can plan on new customers simply because there are more people.  However, with a shrinking population, businesses not only lose the prospects of new customers, they must also face losing existing customers.  If businesses are unable to find new markets, they will be faced with ongoing declines in revenue—or, put simply, an economic depression.

More specifically Arnott and Chaves find that:

[W]e show that the past 60 years—which we think of as “normal”— enjoyed a demographic tailwind which we can quantify. It was worth about 1% per year, meaning that, if we think of 3% growth as normal, it’s really 2% growth plus a demographic tailwind of 1%.

 

The coming decades—due to the rising support ratios from the aging boomers—will experience a demographic headwind of (very roughly—these will be wildly out-of-sample conditions) roughly the same 1%. So, if 3% growth was normal, 1% growth (again, very roughly) becomes normal. This is the reason behind my concerns regarding the legacy of monetary and fiscal experiments, and debt and deficits we leave our children.

So even without a fiscal calamity, Demographic Winter alone will have the economy at stall speed. A little economic hiccup will quickly send the economy into a recession or even depression. Uncle Sam has already run up an $18.1 trillion dollar tab, but adding insult to injury Demographic Winter will create another fiscal tsunami.

The Fiscal Costs of Demographic Winter

In addition to the overall negative economic impact, Demographic Winter will also have a negative fiscal impact on federal, state, and local governments.  First, people over the age of 65 impose significantly more costs to government than younger age cohorts.  Figure 2 (Figure 1 omitted) shows that a typical person over the age of 65 costs government nearly three times as much as a person under the age of 18—even with educational costs factored in.  

While these costs predominantly fall on the federal government (Social Security and Medicare), state governments should be prepared for a significant spike in Medicaid costs for those over the age of 65, especially driven by the cost of nursing homes.

Second, while expenses soar for those over the age of 65, the taxes paid by this age cohort drop by two-thirds as shown in Figure 3.  The primary culprits for this drop are the payroll and income tax, which naturally decline as people retire from the labor force.  As such, the primary fiscal concern for state policymakers moving forward is the eroding income tax base as the county continues to age. [N.B. our study state, New Hampshire, has no income tax.]

Conclusion

Clearly Demographic Winter will be the major economic and fiscal issue for the next few decades. Reversing it will not be an easy task. Of course, understanding why it is happening is the first step in fixing it. There is one variable that significantly correlates with the fertility rate—weekly religious attendance. Has America’s declining church attendance resulted in the declining fertility rate? If so, finding ways to increase church attendance does not sound like a simple solution. But find a solution we must.

Below is a recent interview I did on the subject of Demographic Winter and its impact on Maine (which is currently the oldest state in America as measured by median age).
- See more at:
http://keypolicydata.com/demographics/#sthash.CsGSLgGC.dpuf

For an excellent overview, check out this movie titled “Demographic Winter: The Decline of the Human Family.”

J. Scott Moody is CEO and Chief Economist for State Budget Solutions, a non-partisan, non-profit, national public policy organization with the mission to change the way state and local governments do business.  Reach him at jsmoody@statebudgetsolutions.org.