Falling Birth Rates Will (Probably) Destroy the Economy

What this means for America…and for you.

Gnashing of teeth and rending of sackcloth could be witnessed across the nation earlier this month as economists and politicians digested the recently released birth rate data.

In short, the much expected baby boom that was supposed to develop from people being locked down together, with apparently nothing to do but get it on, never materialized.

In fact, quite the opposite occurred; birth rates dropped even more precipitously than in previous years, and the trend shows no signs of reversing any time soon.

Not only does this spell the end of the “growth at all costs” national economic model, it will also kill entitlements in their current form, removing a very large political hammer that has been employed to scare seniors into voting.

What Did the Data Show?

The national and international reports (links) showed that around the world, birth rates are significantly below the replacement rate.

The replacement rate is the number of babies required to replace the number of people who conceived them. It is measured in the number of babies a hypothetical group of 1,000 women must have to meet this goal.

Right now, the replacement rate is about 2,100 births per 1,000 women, or 2.1 kids per couple. Anything under this limit, and the population starts to shrink.

From the BBC:

You might think the number should be 2.0 — two parents have two children, so the population stays the same size.

But even with the best healthcare, not all children survive to adulthood. Also, babies are ever so slightly more likely to be male. It means the replacement figure is 2.1 in developed countries.

The United States has seen birth rates dropping for the last several decades.

“The rate has generally been below replacement since 1971 and has consistently been below replacement since 2007.

The 2020 data shows that the US birth rate plummeted 4%, to 1,638 births per 1,000 women, or 1.6 kids per couple.

What’s the Big Deal?

If you talk to some people, namely environmentalists and other sustainably minded people, they will rejoice over the fact that fewer people are being born. Having fewer children is the best way to reduce greenhouse gas emissions and physical waste.

Comedians such as Bill Burr and Daniel Tosh have been using this fact in their acts for years. However, if you ask most any economist, an aging and shrinking population is an absolute disaster.

But comedy aside, how will a smaller population actually affect us?

Social Safety Nets

In the US, Social Security and Medicare were created based on the assumption that there would always be more young workers than old retirees.

This was easy to believe, as people died at 67 after “retiring” at 65, and the post-war baby boom gave rise to the largest working age cohort the country had ever seen.

The problems started showing up when people started living longer (and receiving payments for longer), and fewer babies were being born to replace the retirees.

The Social Security Agency calls this “The Demographic Challenge.” Others might call it a waking nightmare.

Without the support of a large class of workers from which to pull tax revenue, some of the largest social safety nets will be exhausted in a very short amount of time.

The Congressional Budget Office calculates that the Old-Age and Survivor’s Insurance (i.e. Social Security) trust fund will be depleted in 2031 and the Hospital Insurance Trust Fund (i.e. Medicare) will be depleted in 2024.

What happens when the trust funds run out?

For Social Security:

…at the time of projected trust fund exhaustion…continuing tax revenue is expected to be sufficient to cover 76 percent of the currently scheduled benefits.

For Medicare:

If the [Medicare] trust fund is exhausted, no law dictates what will happen, but the Social Security Act (which governs Medicare) does not authorize the government to use general revenues to fund the deficit, so Medicare will only be able to make payments based on money it collects in taxes.

Economic Factors

An overall smaller population, specifically a smaller population who are in their prime earning years, means a much smaller consumer base.

Never forget, 2/3 of the entire American economy is based on household consumption. Even a little dip in spending results in billions and billions of dollars not being pumped into the economy.

Business will close and people will lose their job.

China is already freaking out about this, as their population grew, but at the lowest rate since mid-century. In the race to catch the United States and become the world’s largest economy, any potential drop in population would have disastrous consequences.

An ancillary effect from lower economic output is lower tax revenues to fund the government, which introduces us to the Doom-Loop of falling populations.

A shrinking population normally has a large number of the elderly, who rely on the social safety nets described above. Those programs need higher revenues, which the smaller working-age population can’t provide at current tax rates.

So one of two things happens

1. Tax rates go up, reducing take-home pay, which reduces consumption, which shrinks the economy, which results in layoffs, which result in lower take-home pay, which results in lower overall tax revenues, which results in higher tax rates.
2. The government borrows money, increasing our national debt, which requires money printing, which debases our currency, which reduces our purchasing power, which reduces our consumption, which shrinks the economy.

Either way, financially bad things happen.

Personal Impact

All this might seem scary, and it kind of is.

When social security was first created, it was intended to be just one of three “legs” of the overall retirement “stool”, the other two being company pensions and personal savings.

• Company pensions have gone the way of the dodo, replaced with “defined contribution” accounts and 401k’s.
• Personal savings is a joke. For the 40 years between 1980 and 2019, the personal savings rate only averaged 7.3%.

While any changes will probably come in waves over the coming decades, let’s take a look at how to prepare for the inevitable.

Be Prepared for Lower Incomes

We already know that inflation is a hidden tax, but don’t forget about the taxes out in the open.

The Tax Cuts and Jobs Act reduced taxes below most OECD countries, but President Biden is starting to reverse that trend. While I don’t mind paying the taxes I owe (I like smooth roads to drive my kids to public school), I also understand that any tax increase reduces my net income.

You need to be mentally prepared for a reduction in income, adjusting your finances accordingly.

Save and Invest

The FIRE community might crucify me for conflating these two, but they are crucial to financial defense.

Saving money allows you to have immediate liquidity. If you save in a tax-advantaged account such as an HSA, even better.

Investing is your main defense against increased taxes as a) your money can grow, hopefully more than it will be taxed and b) there are several tax breaks at the lower levels of investing (401k, IRA, etc.)

Reduce Your Expenses

I’m not talking about the cliche of giving up your morning latte. I’m talking about long-term, big-picture expenses.

• Can move to a lower cost-of-living area?
• Can you reduce your housing costs by buying a home with just 1 less bedroom?
• If have kids, do they need the best of everything?
• If you don’t have kids, do you really want to be a parent?

Over time, these “big win” reductions will reap dividends.

The Takeaway

For those of you who at or below your prime earning years, the one thing you need to realize is that no one is going to save you.

• Social security will be a bust.
• Company pensions are gone.
• Help from your parents will be nominal, at best.

The good news is that we have been warned of this situation years in advance.

The past two decades have been a complete shit show for many us of, with three recessions, two “forever” wars, and one global pandemic.

The short-term, stress-filled decision making is key to survival, but we need to start thinking on a broader scale. That is the only way ensure not just surviving, but actually living.

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This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.