The American economy is booming and robust. Just look at the chart below, which shows that the overall unemployment rate — the share of people within the labor force who are without work but are looking for it — is lower than it’s been in more than 50 years:

But wait! Americans just don’t want to work like they used to. As you can see in the following chart, the labor force participation rate — the share of all Americans in the labor force — was 62.6 percent in March 2023, considerably lower than the 67.3 percent peak it reached around Y2K:

There’s a paradox here, and it all goes back to how we measure different labor statistics and think about America’s economy. The first chart represents the sexy topline employment figure that presidents usually brag about. But it’s the second chart, representing the size of the labor force, that’s giving economists heartburn. And that’s because labor participation gets at the core of a growing concern for the American economy: It’s growing old. 

Like people in most developed countries, Americans are living longer and having fewer children. That has meant a shrinking pool of workers in recent decades — and a burgeoning cohort of Americans moving into retirement. According to one recent estimate from the Congressional Budget Office, the share of Americans age 65 or older is expected to grow faster over the next 30 years than the share of Americans between the ages of 25 and 54 — referred to as “prime working age.” A 2017 projection from the U.S. Census Bureau found that by 2060, nearly a quarter of all Americans will be of retirement age — up from 15 percent in 2016. The CBO expects the labor force participation rate to continue to dip over the coming decades, and most projections of the U.S. economy forecast a much slower growth rate in the coming decades than it has enjoyed for the past century.

“We’ve basically been in a plateau for the last 10 years, as the strengthening economy has been offset by this downward pull from aging,” said Harris Eppsteiner, a former research economist at the White House’s Council of Economic Advisers. 

In concert, those two forces suggest the coming decades will see fewer Americans working and more who need caregiving, creating a potentially crushing burden on the U.S. economy and welfare system. What’s unclear, though, is just how big of a deal that is for America’s economic future, as a lot hinges on what policymakers do in the coming years to beat back Father Time. For now, the good news is that America has a lot of time to solidify its approach to dealing with an aging population — and its existing welfare system is, perhaps surprisingly, resilient to the coming economic winds of change.

Now, we know from a fairly robust body of research that as a country’s population ages, there is generally a significant and negative impact on overall economic growth. A 2016 paper from the National Bureau of Economic Research found that a 10 percent increase in the share of a population that’s 60 or older — more gentle than the projected increase in the U.S. over the next four decades — decreases growth in per capita gross domestic product by 5.5 percent. And a 2020 paper published in The Lancet found that a decline in the working-age population alone reduces GDP growth rates — and explains why China’s economy was forecasted to fall behind America’s by the end of the century.

We also know that an aging population makes it harder to measure economic recoveries — perhaps even obscuring real gains. For example, a 2017 paper from the Peterson Institute for International Economics found that population aging explained most of the decline in American labor-force participation since the Great Recession. The researchers found that if the U.S. economy had maintained the same age structure throughout the crisis, then an additional 1.7 million workers would be in the labor force. In other words, the labor force lost almost 2 million workers during the Great Recession thanks to aging alone.

“By the beginning of 2019, [labor-force participation] was still meaningfully lower than it was in the fourth quarter of 2007,” Eppsteiner, one of the paper’s co-authors, said. “So naively, you could say, ‘Well, the economy has a really long way to go [to get back to pre-recession levels],’ … but what we're trying to point out was, well, no, because we have this demographic transition happening. So you need to account for that.”

Beyond the measured effects on economic growth, population aging threatens to overwhelm the budgets of many wealthier, developed countries like the United States — and efforts to smooth the effects of demographic transitions on the welfare state have been met with backlash. It is quite possible that, as tens of millions more Americans are projected to need Social Security benefits in the coming decades, a similar upheaval will take place in the American political economy. Ronald Lee, a professor of demography and economics at the University of California, Berkeley, told me that he believes the biggest issue from America’s aging population isn’t declining GDP; rather, it’s how it might affect the distribution of the nation’s resources.¹⁴

“It becomes a problem because of our systems and arrangements for redistributing income to different ages in the population,” Lee said. “It's more about how we distribute the pie, rather than how big the pie is.”

The demographic transition could upset the existing order in a few different ways. As a consequence of population aging, more and more people will move out of working age into retirement, which means the welfare system will be burdened by having more people receiving Social Security benefits than those who pay into the system. For the system to maintain itself, then, younger Americans would have to pay more into the system, (i.e., through higher taxes), accept smaller benefits or stomach a later retirement age. That might be a tough political sell in a country where touching Social Security has been bandied about for generations but never come to pass — even for the most fiscally conservative political leaders.

But that doesn’t mean that the American economy, or even the welfare system, are doomed by an aging population. In fact, though overall economic growth is threatened by population aging, the opposite is true for per capita wages, consumption and productivity, which may actually rise in such a scenario. That’s because an aging population means more capital per available worker, assuming that savings rates stay the same. 

Some have even argued that aging presents an opportunity for growth and innovation in the U.S. economy — not just a challenge — and one that older Americans can have a say in building. Jim Johnson, a professor of strategy and entrepreneurship at the University of North Carolina, Chapel Hill’s Kenan-Flagler Business School, told me that if viewed as an asset, America’s more than 70 million baby boomers could help build “the longevity economy,” or what the economy will have to look like to accommodate an aging population. That could have the added benefit, Johnson added, of helping the millions of workers who were forced to retire during the pandemic, who are disproportionately Black men with low savings.

“Everything has to change in both the built environment and the social environment to accommodate an aging population,” Johnson said. “We have [millions of] baby boomers, turning 65, at the rate of 10,000 per day, every day, seven days a week … a lot of them are working much longer past age 65, and they are major consumers in the marketplace. Given the labor market challenges that we're facing today, post-COVID, ‘encore careers’ are something that we're going to have to pursue in a major way.”

And there are a number of other ways policymakers can mitigate the effects of an aging population on the economy. One widely accepted solution is boosting immigration — particularly among a younger cohort. Higher rates of immigration help countries experiencing population aging because immigrants tend to be younger and therefore more able to work than the domestic population. And forecasts of the American economy tend to assume that by 2030, population growth from immigration will supersede that from natural increases (births minus deaths). Another potential solution, according to Eppsteiner, is promoting more “active labor market situations,” or policies that seek to boost employment among Americans of prime working age. According to a 2016 analysis by the White House’s Council of Economic Advisers, only two OECD countries spent less than the U.S. on programs to encourage labor market participation — like job training programs and employment subsidies — as a share of their GDP.

Moreover, Social Security, which has come under fire for its precarious future funding, might not be in all that much peril. According to Lee, what sets the U.S. apart from European countries is the share of income that its older residents draw from assets, rather than government transfers, in their old age. That arguably reflects poorly on the generosity of the American welfare system, but it also means that we’re potentially more insulated from disruptive demographic shifts.

“In the U.S., on average, about two-thirds of income and consumption [for the elderly] is coming from asset income, and only about a third for the elderly is coming from Social Security,” Lee said. “But if you look at other countries, particularly European countries, it's not uncommon to have close to 100 percent of old age consumption funded by public transfers.”

Perhaps the biggest lesson we can take from America’s ripening population is that there is no one settled conclusion of its ongoing demographic transition. Yes, the American public will continue aging, and the way Americans save, consume and live will likely look a whole lot different in 2043 than in 2023, but there’s no inevitable crisis involved — if we see to it.

“Demographics aren't destiny when it comes to this,” Eppsteiner said. “We have the ability to make policy choices to mitigate the challenges that the aging population poses. We shouldn’t assume that just because we had a baby boom, the baby boom is going to pass into retirement and that we're sort of stuck. Because there are things that we can do.”