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Are our low birthrates and aging population threatening the economy?

If you measure by standard of living, 1.87 kids per couple - the current U.S. birthrate - is just about right

The new demographic reality for the United States, Europe and many countries in Asia and Latin America is an aging population. Governments will face increasing financial pressure as the number of taxpayers shrinks and baby boomers retire. Many see a broad threat to their economies; some countries have begun actively encouraging young people to have more children through tax breaks, subsidized child care, expanded parental leave policies and more.

But are birthrates really too low? In a study published this fall in Science, we found that the answer is yes for a few countries, but for many more, higher birthrates would actually lead to lower standards of living. With a few important exceptions, raising birth rates would be ill-advised.

These conclusions are based on new economic and demographic data compiled by researchers working in our National Transfer Accounts project in 40 countries that provide a comprehensive picture of how people's material needs are met at each age of their lives from birth until death.

If you look at birthrates only from the perspective of public finances, it's true that higher fertility would often be a good thing, especially in countries with pay-now, use-later programs like Social Security and Medicare. Put simply: More births mean more workers to pay taxes that support government programs, including those for the elderly.

But there is also a public cost to producing more children. Consider just one: education. And public finances are only part of the story. Higher fertility imposes large private costs because families, rather than governments, bear most of the costs of raising children

To get an accurate picture of whether birthrates are too low or too high, one needs to look at overall standard of living, which incorporates public and private inputs and outputs.

For the U.S., what one finds (contrary to dire predictions) is that the American childbearing rate is almost ideal. It is at about 1.87 per couple. The slight tip below replacement rate is sufficient to maintain (if not greatly enrich or expand) Social Security and Medicare, while at the same time not overburdening school systems or sinking families as they pay to raise coming generations, or requiring additional investment to equip a growing labor force.

In fact, because the balance of children, working-age people and the elderly is just about right now, encouraging more childbearing today would make everyday Americans worse off now and in the future.

We found that only eight countries in our study would benefit from higher fertility — Japan, South Korea, Taiwan, Spain, Italy, Germany, Austria and Slovenia. Like the United States, Britain, France, Brazil and perhaps China are better off with their current fertility levels. Nearly 20 countries (for which data were available) would benefit from lower fertility, including Mexico, India, Indonesia, the Philippines and all African countries in our study.

Although low birthrates do have real economic costs, these are greatly exaggerated in our view. Japan, for example, is a poster child for low fertility "problems." Yes, GDP growth has slowed as workforce and population have declined there, but this has also reduced the capital costs of equipping new workers, and other expenditures. Lower fertility has meant less savings as well as less investment, but remarkably, consumption per capita has risen at more than 2% annually. The Japanese standard of living has, thus far, continued to improve at favorable rates for an advanced economy. We calculate that Japan would do better with a higher birth rate but only modestly.

How should this new evidence be reflected in public policy? We have three recommendations:

First, only countries with very low fertility should consider activist policies to increase the birthrate. The costs of very low fertility — below 1.5 — are indeed substantial and can amount to 5% to 8% of GDP because the balance between workers and those they support is just too disadvantageous. For these few countries, assessing barriers to marriage and child rearing may be called for, along with substantial public support for the costs of raising children.

Second, governments worried about their fiscal health because of an aging population should look to reform of their public sectors and not to demographic solutions, if they want to maintain a good standard of living for their people. Some will want to retrench pension and healthcare spending, while others may pursue revenue enhancement. Raising the retirement age, for example, can help in both categories.

Third, and perhaps most important, with fertility rates dropping, it makes sense to improve the quality and reach of educational institutions. Low fertility favors more spending on children, and many countries are spending more per child than ever before. If such spending is successful in creating workers who outproduce previous generations, then smaller cohorts will not only not drag down the economy, they may prove to be a boon instead.

Ronald Lee, a demographer with UC Berkeley's Center on the Economics and Demography of Aging, and Andrew Mason, an economist with the East-West Center and University of Hawaii, co-direct the National Transfer Accounts project.

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