Its the Dependency Ratio That Matters Most
There is a good deal of fretting (warranted) about the impact on national and state-level government spending of a population that is growing older. It is relatively easy to project a path for age-affected expenditures both nationally and in NH and to model how changes in spending programs and policies could alter the projected path of those expenditures. Getting agreement on which policies to alter to influence the spending path is a much more difficult task. What is missing from most discussions is an understanding that aging isn’t the only important demographic trend. The dynamics of an increasing number of older individuals and median age of the population are largely misunderstood, but that is a subject for another post. From a fiscal perspective, the most important indicator of spending pressures resulting from the age structure of the population is the “dependency ratio.” The dependency ratio measures the ratio of working-age individuals in a population to those who are generally more ‘dependent” in a population (that is are likely to draw greater resources from governments then they give to governments). Generally dependency is defined as age groups least likely to be in the labor force (children and those age 65+ – which may be unrealistic as individuals are healthier and for a variety of reasons stay longer in the labor force). The dependency ratio affects both spending and revenues (revenue impacts are mostly missing from the demographic discussion and are the subject of tomorrow’s post). A lot of government spending is directed at these groups – young people via schools and older citizens via things like Medicare, Medicaid, Social Security etc. The chart below shows the rise in the projected dependent population in NH. The chart shows that the past decade has been a “sweet spot” for the dependency ratio in NH, with an overall decline in the percentage of the population in “dependent” years (albeit with an increase in older dependency). I produced a similar chart in the early 2000’s and suggested state government make good use of the state’s time in the “sweet spot” by adopting policies to minimize the impacts of future increase in the dependency ratio in the state (it wasn’t the first nor will it be the last time my thoughts were ignored by lawmakers – in fairness, it’s not always unreasonable for them to do so). Certainly some policies have looked to reduce the impacts of an increasing older population. But with limited, and in some years declines in the youth dependency, less attention has been given to innovative ways to slow the growth in spending (largely education expenditures) in a way that is proportional to growth in the youth population. Effectively managing changes in spending pressures without producing unacceptably large overall increases in spending or unacceptable reductions in services requires that resources not be locked in specific spending categories or programs, but rather be allowed to rise and fall and flow to and from programs programs and services most influenced by demographic and economic pressures. Tomorrow: The other side of the ledger – demographic influences on revenues.