Is an older economy a weaker economy?

Since the Great Recession, many people have asked Federal Reserve officials if they are penalizing senior citizens by keeping interest rates low. Questioners are concerned about retirees living mainly off savings and earning low rates on those savings.

But Fed policymakers are not unconcerned about seniors. In fact, the notion of monetary policy penalizing or rewarding one group or another highlights a misconception about policy's objectives and reach. Monetary policy does not seek to pick economic winners and losers. It is, rather, a "blunt tool" designed to create an environment conducive to broad economic prosperity.

Channeling resources toward one or more groups based on demographics or other factors—what economists call the "distributional effect"—is the province of fiscal policy. Research, including this from the Philadelphia Fed, finds that the distributional effects of monetary policy are complex and uncertain.

Former Fed Chairman Ben Bernanke explained in a March 2015 post on his Brookings Institution blog that raising interest rates too soon would hurt and not help seniors. Such a premature move, Bernanke said, would likely slow the economy and lead to lower returns on capital investments for seniors and everyone else. (See the sidebar below, "Graying of America Expected to Produce Slower Economic Growth.") "The slowing economy in turn would have forced the Fed to capitulate and reduce market interest rates again," Bernanke wrote. Several major central banks faced precisely that scenario in recent years.

Graying of America Expected to Produce Slower Economic Growth

The changing age structure of the U.S. population is likely to result in slower economic growth and consumption as labor market participation declines. Much depends on the decisions policymakers take to address the fiscal challenges of aging.

The good news: experts predict economic expansion, just not as much compared with historical trends. The Bureau of Labor Statistics forecast in December 2015 that the U.S. economy will grow at a slower pace than before the 2007–09 recession, citing aging and declining labor force participation.

Gross domestic product (GDP), the total value of goods and services produced in the nation, expanded at an average rate of 2.1 percent annually from 2010 to 2014, down from 3 percent or higher during the previous decades. The bureau expects GDP to grow 2.2 percent over the 10 years that will end in 2024 (see the chart at the top of this page).

*ProjectedSource: U.S. Bureau of Labor StatisticsAnnual rate of change (percent)

Similarly, growth in personal consumption spending—the biggest component of GDP—will also ease, the labor agency said. From 2014 to 2024, personal consumption expenditures are expected to rise 2.4 percent on average. While that is stronger than the 2.2 percent growth from 2009 to 2014, it is lower than the 2.9 percent consumption expansion before the Great Recession and 3.8 percent growth from 1994 to 2004.

Many variables, many unknowns

Louise Sheiner, a senior fellow in economic studies and policy director for the Hutchins Center on Fiscal and Monetary Policy of the Brookings Institution, has coauthoredresearch on aging concluding that without a marked rise in labor market participation, consumption growth will have to fall. In a 2006 research paper, she and her coauthors identify a number of factors that could affect consumption in the coming years. These variables include the personal saving rate, productivity growth or contraction, and the cost of health care.

Still, uncertainty over the direction of U.S. fiscal policy, especially with regard to whether lawmakers cut or raise U.S. deficits or change the rules governing Social Security and Medicare, makes it hard to predict when any economic effects from aging might materialize, she says.

"There are a lot of models that say consumption is going to fall and savings will increase" as a consequence of aging, said Sheiner, a former economist with the Federal Reserve Board of Governors. "But a lot of them assume that the government puts itself on a sustainable path and cuts benefits or raises taxes for pensions."

Additionally, policies that might address the consequences of aging on issues such as labor force participation need to take into account the widening inequality in mortality by income in the United States, Sheiner said. For example, some have proposed boosting the retirement age as one possible solution to try to keep older people in the workforce longer. But a January 2016 report from the Center for Retirement Research at Boston College found a gap in life expectancy along lines of socioeconomic status, raising questions about the potential feasibility of such a policy.

The report, titled Does a Uniform Retirement Age Make Sense?, is based on research that estimated trends in mortality from 1979 to 2011 by education. It concluded that although all workers were likely to live longer today than in the past, those with lower educational levels did not live as long as people with higher socioeconomic status (SES). "Policies seeking to extend work lives that treat all workers the same will tend to cut into the retirement of low-SES workers more than high-SES workers," the center's researchers wrote.

Now or later?

Ben Bernanke discussed various actions the nation's policymakers could take to address changing U.S. demographics during his time as Federal Reserve chairman, including reforming entitlements, raising private savings rates, and making improvements to education. He warned that acting later rather than sooner on these fiscal issues could lead to gloomy outcomes for consumption and overall growth.

"If we decide to pass the burden on to future generations—that is, if we neither increase saving now nor reduce the benefits to be paid in the future by Social Security and Medicare—then the children and grandchildren of the baby boomers are likely to face much higher tax rates," Bernanke said in a 2006 speech. "A large increase in tax rates would surely have adverse effects on a wide range of economic incentives, including the incentives to work and save, which would hamper economic performance."

Karen Jacobs, Staff writer for Economy Matters

Next page: A different question: Aging's impact on the environment in which policy is made.

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