All over the world, people are living longer and having fewer children. Life expectancy is expected to increase in most countries. Meanwhile, more than half of the world’s countries already have total fertility rates below the level needed to maintain their population. Globally, average fertility is on track to fall below the replacement rate by mid-century.
Some see these trends as an existential threat. Jonathan Last, writing for The Bulwark, calls it a “demographic winter,” a “recipe for economic stagnation, geopolitical destabilization, and humanitarian tragedy.” Others welcome the same trends. Frank Götmark, Philip Cafaro, and Jane O’Sullivan, an international team of environmental scientists, see them as “good for us, good for the earth,” an “achievement misdescribed as a problem.” On one point, though, everyone agrees: The balance of risks and benefits depends on how well we prepare for a low-fertility future.
Some of the most important preparations concern social policies that pertain to retirement, social insurance, child welfare, education, and health care. As my Niskanen Center colleague Brink Lindsey has pointed out, much of our contemporary welfare state is premised on a perpetually rising population. “So, what happens,” he asks, “when that premise doesn’t hold any longer?” That is just the question I seek to answer in this commentary. In doing so, I will take a pragmatic approach that accepts declining fertility and falling population as given, dealing elsewhere with the issue of whether we should embrace those trends or try to reverse them.1
The demographics of consumption and work
As fertility falls and life expectancy increases, the pattern of earnings and consumption across generations changes. The youngest and oldest cohorts tend to consume more than they earn, while those in the middle earn more than they consume. Figure 1 shows past and projected patterns of labor income and consumption in the United States for three representative years, 1960, 2020, and 2060.2 The percentages on the vertical axis show the share of total labor income or consumption that is attributable to each age cohort.
For each age group, labor income + property income + public and private transfers received = consumption + saving + taxes paid. Only labor income and consumption are shown directly on the figure. The other variables account for the gap between labor income and consumption at each age. Transfers (largely for education) and parental spending on living expenses make it possible for the youngest age cohorts to consume more than they earn. For the oldest cohorts, the excess of consumption over income is funded partly by property income, partly by dissaving, and partly by transfers such as retirement benefits and medical services. The middle generation also receives some transfers and property income but not enough to fully fund saving and taxes. As a result, consumption is less than labor income for the middle group.
The old-age dependency ratio provides a broad-brush representation of the trends shown in Figure 1. The OADR is the ratio of the population aged 65 and older to the entire adult population. If earnings and hours worked per person at each age were constant, an increase in the OADR would automatically reduce total labor-force participation and income per capita. That, in turn, would require a decrease in consumption by the young to fund increased transfers to the old, or decreased consumption by the old to relieve the burden on the young, or a little of both.
In practice, however, labor-force participation is not as closely tied to changes in the OADR as one might think. Not all adults who are younger than 65 work, and not all who are 65 and older leave the labor force. Labor-force participation at various ages, earnings, and productivity all vary widely from one country to another. Those variations are clearly visible in Figure 2, which shows dependency and participation data for the United States and 48 of its high-income peers:3
The chart shows that participation rates vary widely even among countries with similar age structures. The United States is near the middle of the pack with respect to both variables. Contrary to what we might expect, there is no statistically significant tendency for adult labor force participation to decrease as old-age dependency increases. If anything, there is a slight tendency for countries with higher OADRs to have higher participation rates.
About a quarter of the variation in participation shown in the chart is associated with differences in per-capita income. Even when we adjust participation rates for income, however, there is still a slight tendency for higher OADRs to be associated with higher, not lower participation rates. In part that is probably due to the way labor markets respond to demographic change. As a rising population of older adults increases the demand for younger workers, wages rise, and more young workers enter the market. For the same reason, fewer older workers decide to retire at age 65.
Productivity (output per hour worked) is also variable, both across countries and over time. In the United States, as Figure 3 shows, labor productivity has increased on average by about 2 percent per year since 1960, with year-to-year variations but no pronounced long-term trend in the rate of increase.
Many factors contribute to differences among countries in labor-force participation and productivity and their trends over time. Culture, technology, geography, and climate play important roles. But social policy, the focus of this commentary, also matters. In the next several sections, I will review some of the main areas of social policy with a focus on ways in which policy changes can support productivity and labor-force participation as fertility falls and population growth slows down.
Immigration
Immigration is the area of social policy with the most obvious demographic effects. A recent IMF report goes so far as to say that “only net immigration can ensure population stability or growth in the aging advanced economies of the North.” But, although there is certainly room for improvement in current policies, it is unrealistic to view immigration as a stand-alone solution to demographic challenges.
Consider some numbers. The U.S. Census Bureau estimates that with current immigration rates, the U.S. population will grow from 333 million to 364 million between 2022 and 2060 while the old-age dependency ratio will rise from 39.7 percent to 42 percent. If immigration increased by 50 percent, total population would grow 9 percent more than in the baseline case, to 397 million, but the OADR would be just half a point lower, at 41.5 percent.
Even a doubling or tripling of immigration would not be enough to stabilize the dependency ratio, yet few Americans seem willing to accept even a 50 percent increase. According to a 2024 Gallup poll, just 16 percent of respondents were open to an increase in immigration while 55 percent would like to see a decrease. In short, neither the math nor the politics make immigration by itself look like a practicable solution to the problems raised by declining fertility.
However, to say that immigration is not a cure-all does not mean it has no role to play in preparing for a low-fertility future. Targeted reforms of specific aspects of immigration policy would be helpful, both by filling in key shortages in labor supply and by giving more time to adjust other policies to slowing population growth.
H-1B visas are a case in point. These allow foreign workers with certain skills, such as software engineers, to work for U.S. companies that cannot find suitable domestic candidates. The visas are good for three years and workers can extend them to six. Those admitted under H-1B have a mix of age, earnings, consumption, and taxes that hits a sweet spot relative to the profiles shown in Figure 1. The result is a beneficial effect on dependency whether or not H-1B recipients have children while in the United States.
As of early 2025, there is a nominal annual cap of 85,000 on new H-1B visas, but many employers are exempt. Including renewals, the total number working under H-1B visas is in the hundreds of thousands. Some spouses are also able to work. Even so, H-1B visas are vastly oversubscribed, so one obvious way to capture more benefits would be simply to issue more of them. Another suggestion is to ease restrictions on changing jobs, which could improve productivity and earnings of H-1B holders. Some reformers call for easing the pathway from H-1B to green card to citizenship. Even if people who originally came on H-1B visas stayed into retirement, their lifetime profile of earnings, taxes, saving, and consumption would still be more favorable than that of the average U.S. citizen.4
The Niskanen Center sees immigration as an irreplaceable pillar of America’s economic, civic, and cultural strength. Its immigration policy team has identified many other reforms that could bolster America’s ability to attract critical workers and enhance economic dynamism, for example, by easing critical shortages of healthcare workers, recapturing green card slots that currently go unused due to administrative complications, and creating new immigration pathways such as a new visa for AI talent from NATO allies.
Support for families with children
Many countries offer aid to families with children. Such policies include direct financial support, increased supply of childcare services, parental leave policies, and support for child and maternal healthcare services. In the United States, policies that support families with children include the Earned Income Tax Credit, the Child Tax Credit, the Child and Dependent Care Tax Credit, and a Head of Household filing status for income taxes. These and other policies are described in detail in a 2023 report from the Niskanen Center by Joshua McCabe and Julia Pelletier.
A 2021 meta-analysis published in Population and Development Review found that family-friendly policies do have measurable positive effects on fertility. However, the authors cautioned that interpretation of existing studies is not always easy because of factors such as publication bias and lack of reliable counterfactuals. Even where positive effects are found, pronatal policies can be very expensive, perhaps as much as $1 million per added birth, since benefits go to all parents, not just to those who would otherwise not have had children. As economist Elizabeth Brainerd of Brandeis University puts it, “Pronatalist government policies can increase fertility rates modestly, but they are unlikely to move fertility rates up to replacement levels.”
But even if they do not restore above-replacement fertility levels, policies that support families with children have other effects that can help countries cope with emerging demographic realities. A recent research brief from Child Trends gives several examples. Some benefits are academic, including better school achievement, higher high-school graduation rates, and higher college attendance. Those translate into higher productivity and earnings later in life. More aid from programs like the Earned Income Tax Credit (EITC) and SNAP (food stamps) was also associated with reduced incidence of low birth weights, which in turn, have lifelong consequences for health and job market success. Enrollment in Head Start improved not only children’s academic performance, but also labor market participation by parents. All these effects are important for maintaining the levels of productivity and workforce participation needed to support living standards as a country’s population ages.
All things considered, then, there is a strong case for supporting families with children. However, the policies currently in force in the United States leave much room for improvement. A recent Niskanen Center report outlines options for reform. It is not all a matter of better funding of existing policies. There are too many programs, often with overlapping or conflicting aims. Fewer programs, each more securely funded, could minimize work disincentives and penalties for marriage and family formation.
Social Security and retirement
Since 1940, retired American workers have received benefits from Old-Age, Survivors, and Disability Insurance, popularly known as Social Security. Stripped to its essence, Social Security is a pay-as-you-go system in which workers pay a dedicated tax that, in turn, funds benefits to current retirees. The money flows through a “trust fund” into which tax revenues are deposited and from which benefits are drawn. This system works well when the population is growing, so that the generation paying into the fund is always than the generation taking money out. But since 2010, the retirement of the Boomers has forced the fund to tap its accrued reserves to make payments. Those reserves won’t last long, so we will soon have to do something. Everyone knows it, but the partial measures undertaken to date have only postponed the day of reckoning.
The obvious long-run fixes are to raise the payroll tax, cut benefits, or raise the retirement age. Many proposed combinations can be found in publications of the AARP, the Republican Study Committee, the Peterson Institute, and the American Academy of Actuaries, to name just a few sources. Every conceivable combination helps some people and hurts others.
For all that, the American Social Security system is not in the worst trouble among the retirement systems of wealthy democracies. In part, as Chris Pope explains in a report from the Manhattan Institute, that is because our Social Security is not especially generous. Designed primarily to raise the income floor for the elderly poor, it replaces only about 50 percent of the income of retirees who have average earnings and about 60 percent of those with low earnings (OECD data). The Netherlands, in contrast, replaces more than 90 percent of earnings for high and low earners alike.
The structure of benefits makes the Social Security system as a whole progressive even though the payroll tax that supports it is, by itself, regressive.5 The payroll tax applies in full to the lowest earners while earnings above a maximum amount are exempt. (The 2025 cutoff point is $176,100, a little less than 150 percent of median household income.) The progressivity of Social Security as a whole, and its fiscal sustainability, could be enhanced by changes to the payroll tax. Exempting low earners and moving the maximum higher up the income scale would reverse the regressivity while holding revenue constant or even increasing it. Alternatively, we could scrap the payroll tax and finance retirement benefits out of general taxation, using adjustments to income taxes or a value-added tax to recoup the revenue lost from the payroll tax.
Unfortunately, as the AARP points out in its survey of reform alternatives, people would see any steps to further tilt net benefits toward low earners as “changing Social Security from an earned right to welfare.” After years of false characterization of Social Security as a savings program, in which we pay for our own eventual benefits with the contributions we ourselves made years before, any hint to the contrary is political poison.
Meanwhile, other policies make it easier for people to save for their own retirement. From Keough plans for self-employed professionals, first authorized in 1962, to today’s popular 401(k) plans, these aim to subsidize savings through a combination of tax benefits for workers and employers. Unlike the moderately progressive Social Security system, these plans, on balance, tilt toward high earners. According to one estimate, they provide 24 times more benefit to taxpayers in the 80th to 99th percentile of earnings than to those in the 40th to 59th percentiles. Making such plans more nearly income-neutral would represent another way of freeing up tax revenue to bolster Social Security,
Other more modest reforms could also help prepare Social Security for the low-fertility future. One perennial idea, floated again during the 2024 presidential campaign, is to end taxation of Social Security benefits. The Tax Foundation warns that doing so would cost the budget $1.6 trillion over 10 years and create a new hole in the income tax without a sound policy rationale. Unfortunately, though, the quirky formula now used to calculate taxes on Social Security benefits subjects retirees who wish to work to much higher marginal tax rates than younger workers with comparable incomes. Repealing the tax would thus improve work incentives. A study from the Richmond Fed argues that removing taxation of benefits would actually induce enough additional work, especially by higher-skilled beneficiaries, to make up for the lost revenue. (The Tax Foundation does not ignore work incentives, but it makes a more conservative estimate of their effects.)
Even if you are leery of ending taxation of benefits altogether, the Fed’s analysts show that simply taxing Social Security benefits as ordinary income, rather than using the current arcane formula, would also cut marginal tax rates and increase employment incentives for retirees.
Work and welfare
Even in the highest-income countries, a significant share of the working-age population receives benefits from one or more means-tested income support programs. In the United States, some of the largest are the EITC, SNAP, and Medicaid. Beyond these, one source counts as many as 100 smaller means-tested programs at the federal level alone.
In all means-tested programs, beyond some point, extra earnings lead to reduced benefits. Sometimes benefits end in an abrupt cliff when the recipient reaches a certain earnings threshold. In other cases, benefits fall by a fraction of a dollar for each dollar earned. In either case, the reduction in benefits that accompanies extra earnings creates a disincentive to work.
The problem of disincentives is all the worse because benefit reductions for multiple programs are additive. For example, if EITC benefits fall by 21 cents per dollar earned and SNAP benefits by 24 cents, then total benefits fall by 45 cents per dollar earned – an effective marginal tax rate (EMTR) of 45 percent. Payroll or income taxes on earned income make EMTRs even higher.
The EMTRs from multiple welfare programs are especially high for the “near poor” – workers with incomes just above the official poverty level, who are struggling to make the transition from public support to full self-sufficiency. For example, a typical Boston family participating in only the most common programs would keep just 13 cents of each dollar earned in the range from 100 to 200 percent of the poverty level. Over parts of that range, benefits would fall by more than a dollar for each dollar earned.
Other federal programs have work disincentives of their own. Tax rules for Social Security benefits, discussed in the preceding section, are a case in point. The Supplemental Security Income (SSI) and Social Security Disability Insurance (SSDI) disability programs also have features that discourage part-time work. Niskanen Center’s Will Raderman suggests that the disincentives could be mitigated by making SSI and SSDI more like Veterans’ disability, which allows beneficiaries to take full advantage of work and business opportunities without penalty.
Fixing the welfare system to reduce work disincentives is not an easy undertaking, but given the will, we could do it. One approach would be to consolidate and cash out as many programs as possible instead of offering separate in-kind programs for food, housing, and other specific needs. Doing so would move in the direction of a negative income tax or even a universal basic income. A universal healthcare program would be another big step.
Mitigating the work disincentives of income support programs would be a worthy goal even with a growing population. As growth slows, such reforms become even more important, both for encouraging labor force participation among young low-income workers and for encouraging full- or part-time work past the age of 65.
Unemployment Insurance
Unemployment Insurance (UI) is separate from welfare. Its primary purpose is to protect workers from the impact of temporary job loss for reasons beyond their control. As in the case of welfare, however, poorly designed unemployment policies can have unintended consequences for labor-market participation and productivity.
A review of UI policies by Matt Darling and Will Raderman of the Niskanen Center makes several recommendations. One is to increase the level and duration of benefits to give unemployed workers more time to find jobs that match their skills. Another is to place less emphasis on work-search requirements and more on counseling, job-search planning, and other active labor market policies. A third is to improve the administrative capacities of state unemployment systems, which would require reforming how program administration is financed at the federal level.
Addressing the shortcomings of unemployment insurance may seem like an indirect way of addressing demographic change, but as the working-age share of the population decreases, it is important to look for every opportunity to improve the functioning of labor markets.
Healthcare
Healthcare is still another area of social policy that will need special attention as the population ages. There are two issues at stake: One is cost, since use of healthcare services rises with age. The other is keeping people healthy enough to stay in the labor force as long as they choose to.
There is bad news and good news here. The bad news is that older people spend more on healthcare, and their numbers are increasing. People 65 and older already account for a third of healthcare expenditures, and per capita spending for those 85 and older is about three times as high as for those aged 65 to 74. The good news is that spending is unlikely to grow fully in proportion to age. Instead, proximity to death is a better predictor than age alone. The longer-lived older generations of the future will be healthier at any given age than those living today. Better age-specific health means lower medical costs per person and greater fitness for work for the younger old who choose not to retire.
International data show that other high-income countries manage to supply high-quality care to all at far lower cost than the spotty coverage in United States. Matching their performance will not be easy, but it should not be impossible. One general principle is clear, however: Reforming health care for a low-fertility future will require attention to both demand and supply.
Fixing the demand side of healthcare means ensuring that people with medical conditions can pay for the treatment they need. Inability to pay is a greater problem in the United States than elsewhere. A survey by the Commonwealth Fund found that half of Americans with lower incomes skipped needed medical care or failed to fill prescriptions because of cost – more than twice as many than in 10 peer countries. Even among those with higher incomes, the number of Americans who skipped needed care was greater than elsewhere.
Ensuring that all who need care can obtain it would encourage labor-force participation and raise productivity. In previous work, I have suggested Universal Catastrophic Coverage as one way of accomplishing that goal, but there are many other proposals on the table as well. Liran Einav and Amy Finkelstein have outlined a different proposal for universal provision of basic services as part of the Brookings Institution’s Hamilton Project. A white paper from FREOPP outlines still another approach, Medicare Advantage for All.
Reforming the supply side of healthcare means decreasing costs, easing onerous regulations, and making providers more responsive to patients’ needs. A recent Niskanen Center report by Lawson Mansell includes some specific recommendations: Reform or eliminate certificate-of-need laws that discourage construction of new facilities. Improve licensing portability to make it easier for professionals from one state to practice in others. End federal policies that encourage doctors to train as specialists rather than in primary care. Reverse policies that incentivize excessive consolidation of hospitals and other facilities. Expand scope-of-practice regulations to allow nurse practitioners and physicians’ assistants to provide a broader range of services.
Conclusion
Declining fertility is a fact in all but the poorest countries. Although many observers express alarm, the principle causes of lower fertility – better education, higher incomes, empowerment of women, fewer teen pregnancies, and lower mortality at both ends of the human lifespan – are all developments that we should welcome for their own sake. Longer life expectancy, too, is welcome for its own sake, despite the policy challenges it creates.
We in the United States can be thankful that we have at least a little room to maneuver. According to 2022 data from the World Bank, our total fertility rate of 1.7 is below the replacement level, but not as low as the UK (1.5), China (1.2) or South Korea (0.8). Our popularity as a destination for immigrants is another plus. But in order not to squander these advantages, we need to begin the necessary policy reforms immediately.
Writing in Foreign Affairs, Nicholas Eberstadt points out that the same formula that built today’s prosperity in the past can help us meet the challenges of a future world marked by declining population. “The essence of modern economic development,” he points out, “is the continuing augmentation of human potential and a propitious business climate, framed by policies and institutions that help unlock the value in human beings.” Social policy reforms that encourage labor-force participation and boost productivity fit well with that formula.
- “The Birth Dearth: Panic or Celebrate?” Forthcoming in Milken Institute Review. ↩︎
- The underlying data come from the National Transfer Accounts project (NTA). The charts were generated by the NTA’s Interactive Data Explorer. ↩︎
- The 49 countries shown in Figure 2 include all of those listed by the World Bank as having per capita incomes over $10,000, except for six oil-rich Persian Gulf countries. The heavy use by those countries of migrant workers (up to an estimated 95 percent of the labor force in Qatar) makes them demographic outliers compared to countries like the United States, where immigrants are more likely to bring their families and stay permanently. ↩︎
- A report by Daniel DiMartino for the Manhattan Institute finds that immigrants to the United States on average have a positive fiscal impact over their lifetimes, paying more in taxes than they receive in government benefits. The impact is smaller or negative for those who have lower education or who immigrate later in life. However, H-1B visa holders fall in the most favorable group, immigrating early in their working careers and having higher than average educational attainment. ↩︎
- The Congressional Budget Office estimates that for people in the bottom fifth of the earnings distribution, the ratio of benefits to taxes is almost three times as high as it is for those in the top fifth. ↩︎