The Economics of Aging

Abstract

The U.S. population is growing older and living longer. Yet older people have been leaving the labor force at younger and younger ages. Moreover, most Americans have saved very little. At the same time, the cost of medical care has been increasing. These demographic trends and changes in individual circumstances will contribute to some of the most important economic transitions and policy challenges for the coming decades. Understanding the determinants of retirement, the nature of saving for retirement, and how to more efficiently provide medical care are perhaps the most critical issues that demographic trends have forced on us. These and related issues make up the activities of the NBER's Program on the Economics of Aging. Begun in 1986, the Aging Program has developed primarily around large, coordinated research projects that simultaneously address several interrelated issues in the economics of aging. Extensive funding for the program has been provided by the National Institute on Aging (NIA), both through multiple research grants and through a Center grant, which provides centralized infrastructure support to the Program effort. The major research categories in the NBER's Program on the Economics of Aging are: 1) saving and the evolving financial circumstances of older Americans; 2) work and retirement decisions at older ages; 3) health care; and 4) aging around the world. In each of these areas, a major goal of the research is to better understand individual decisions as people age, and how these decisions are affected by individual circumstances and the economic incentive effects of government policies and programs. This article summarizes research in each of these areas. Much effort also has been directed to attracting young researchers to this field. To that end, our NIA Fellowship Program provides annual fellowships to between five and ten graduate students who are beginning research on the economics of aging. It also provides two or three postdoctoral fellowships each year to recent Ph.D. recipients, enabling them to spend a year at the NBER to do research on issues in the economics of aging and health care. The combination of NIA support for research training and fellowships, new project development, data resource development, and smaller exploratory grant support has been instrumental in our efforts to expand the program, and to engage outstanding new scholars in research on aging. Nearly 100 papers are completed annually on issues in aging by participants in the NBER Program. Some of these appear in a series of books published by the University of Chicago Press.(1) The Evolving Financial Circumstances of Older Americans The way Americans provide for financial support in retirement is changing rapidly. All three of the traditional pillars of retirement support - Social Security, employer-provided pensions, and saving - are in transition. Potential changes in Social Security have received the most public attention. The aging of the population has made the continuation of current levels of real benefits from Social Security an uncertain prospect. Employers, too, are reacting to the increasing costs of their retirement benefits, with many of them discontinuing traditional pension benefits and retiree health insurance programs. At the same time, the rapid expansion of 401(k) programs, and the dramatic growth in savings in 401(k) and IRA programs, suggest a transition in personal savings as well. While most households retiring in the past had essentially no financial asset savings, that may not be true in the future. By the mid-1990s, at least one spouse in over half of U.S. families was eligible for a 401(k) plan, and over 70 percent of those who were eligible made contributions. Today, over $100 billion is contributed annually to 401(k) plans. The Growing Influence of Retirement Savings A long series of studies by Steven Venti, James Poterba, and me has considered whether IRAs and 401(k) programs have added to personal saving, or whether they have simply replaced saving that would have already taken place in some other form. …