The economic impact of the ‘golden years’ is just beginning

Somewhere around 17.7 percent of the U.S. population is now over 65 years old — the highest number since 1920 and significantly more than 2010’s 13 percent. 

In a few words, the American population is aging rapidly, and that’s changing the country’s mix of economic activity in unexpected ways, including which sectors are prospering most and which are not. This will affect our country in both the short and the long run.

Consider inflation. Americans over 65 — those now enjoying their golden years — are less likely to be worried about debt and the interest rates they might pay when borrowing money. This affects the ability of the Federal Reserve to use interest rates to slow the economy and reduce inflation. Indeed, while enjoying a slower-paced life, most seniors live at least partly off past savings. Higher interest rates mean they have even more money to spend.

When we add the fact that America’s elected politicians taken together are, on average, close to the oldest ever, we get a political economy highly focused on short-term activities — consumption now — and less focused on making investments that may yield larger future benefits.

This graying group of consumers was a key driver of household spending in 2022, accounting for 22 percent of the total and rising. Other major demographic groups accounted for not just smaller, but falling shares.

In a real sense, those enjoying their golden years are driving the economy, but in what direction?

Common sense and personal observations tell us that many senior citizens are not inclined to simply acquire more stuff to furnish homes, apartments and beach cottages. Indeed, it’s just the reverse. The older population is more likely to be engaged in downsizing and getting rid of stuff. The golden ones are more interested in health care, services, short holidays and a good evening out on the town. And as more of us enter our post-65 years and change our spending patterns, it starts to add up and alter what gets produced in the larger economy.

We saw signs of this in the recently released Bureau of Labor Statistics September jobs report, which showed that 336,000 jobs were added to the economy for that month. Of those new jobs, some 70 percent were in government, health care or hospitality and leisure. In fact, employment in the hospitality and leisure sector has recovered to pre-pandemic levels. On the other hand, employment sectors that support the production of stuff look rather weak.

The overall uptick in jobs was enough to scare some Fed watchers, who became a bit more worried that it would raise interest rates another notch at the next meeting instead of holding pat. Indeed, now we must think about the challenge faced by the Federal Reserve Open Market Committee when it meets again to decide what to do about inflation in the wake of a resilient economy.

Because of what might be termed the “golden age effect,” and for other reasons, too, economic activity seems to be buzzing along in spite of higher interest rates. In fact, the International Monetary Fund has just raised its estimate for U.S. 2023 real GDP growth to 2.1 percent, up about one-third of a percent since July. This all suggests the Fed will have to keep a foot on the brakes until tight money and higher interest rates take a larger plug out of the under-65 part of the economy. Meanwhile, the golden age sector may go sailing along.

Finally, let’s consider our golden-age politicians. Like their citizen counterparts, they hope to see the benefits of their actions while still alive and well. And, of course, they must keep the always-engaged over-65 constituency happy. This predicts a preference for expanding the benefits of Medicare, providing less expensive prescription medicines and finding ways to keep Social Security secure — at least for current beneficiaries, given that the program’s funding will soon be compromised.

Meanwhile, we must all get accustomed to outcomes generated by an aging population, because this has only just begun.

Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University’s College of Business and Behavioral Sciences.