DEPENDING ON WHO you talk to, we have a major problem in the U.S. with productivity growth, economic growth, the trade deficit, the budget deficit, public sector pensions, Social Security, Medicare, Medicaid—or, if folks are feeling especially gloomy, perhaps all of the above. But the reality is, these issues are, at least in part, merely symptoms of a far larger problem. What’s that? We’re rapidly approaching the point where we don’t have enough workers producing the goods and services that society needs. In other words, what we have, more than anything, is a demographic problem. Consider the size of the working-age population relative to those of retirement age. As of 2010, there were 4.6 Americans age 20 to 64 for every person age 65 and up, based on data from the United Nations. That figure is projected to fall to 3.5 in 2020 and 2.7 in 2030. The “old-age dependency ratio” continues to deteriorate from there, though at a slower clip. Worrisome? It is, though other developed nations are in even worse shape. As of 2020, the comparable figures are: U.K. 3, Spain 3, France 2.7, Germany 2.7, Italy 2.4 and Japan 1.9. Fast forward a mere 10 years to 2030, and the numbers are: U.K. 2.5, Spain 2.2, France 2.2, Germany 2.1, Italy 1.9 and Japan 1.8. Because we’re heading into a world with potentially too few workers and too many retirees, we have the slew of problems that dominate today’s headlines: economic growth stuck below the 3% long-run average, public sector pensions busting state budgets, soaring Medicare and Social Security spending, and so on. What’s the solution? It’s important to understand what won’t fix the problem. Suppose we “shored up” the Social Security trust fund. We might mandate that the Treasury Department makes large annual contributions to the trust, or have the Treasury pay a higher interest rate on the bonds held by the trust, or invest part of the trust’s assets in the stock market. Suppose all of this allows Social Security to continue paying benefits at current levels for decades to come. That still leaves a fundamental problem: What happens when those Social Security checks get spent? Remember, stocks, bonds, Social Security checks and cold hard cash are just mediums of exchange. Ultimately, they have value because we can convert them into goods and services. If enough goods and services are available to be bought, all’s fine and dandy. What if they aren’t? Houston, we have a problem. Suddenly, we might be looking at accelerating inflation, as all those dollars compete to buy a limited supply of goods and services—and some folks will find they can no longer afford the lifestyle they once enjoyed. What to do? Either we need to increase the supply of goods and services or we need to restrain demand. There’s a slew of possible solutions, but here are four possibilities. First, we could push everybody to spend less. If we don’t want the ugliness of higher inflation, we might raise taxes or cut Social Security benefits, so people have less money to spend. Needless to say, this is the least desirable option. Second, we could increase the number of folks in the workforce. We might allow greater immigration, offer tax breaks to employers who hire older workers and raise the eligibility age for Social Security. That larger workforce would spur economic growth, while also increasing the income and payroll taxes needed to fund government spending.

"Within a few decades, some parts of the developing world will have even bigger demographic problems than the U.S."

We can debate the best way to keep folks in the workforce for longer. But however we do it, I don’t think it’s such as awful prospect: Many of us get a lot of satisfaction from work—as long as we can do it on our own terms, perhaps working part-time after age 65 or working from home. In fact, even without government action, I suspect many folks will opt to stay in the workforce for longer, either fulltime or part-time, simply because they can’t afford the retirement they want. It could be that many Americans are already helping to solve our demographic problem—through their abject failure to save. Third, we might partially solve our demographic problem with innovation. As the supply of workers slows, expect the pace of automation to increase, as companies substitute capital for labor. If the robots are coming, we should welcome them with open arms. Fourth, we could get our goods and services from abroad. The demographics in developing countries are far more favorable than in the developed world. Again, consider the dependency ratio—the number of working-age folks for every person age 65 and up. More developed regions (Europe, North America, Japan and Australia) see their collective dependency ratio plunge in the years ahead: 3.8 in 2010, 3 in 2020, 2.4 in 2030 and 2 in 2050. Less developed regions (Africa, Latin America and Asia except Japan) also see their populations age in the decades ahead, but the absolute dependency ratio remains far higher: 9.6 in 2010, 7.7 in 2020, 5.9 in 2030 and 4 in 2050. Potentially, these less developed nations will sell us the goods we need and, in return, we’ll sell them our assets—entire corporations, stocks, bonds, real estate, whatever they’ll take. Interestingly, within a few decades, some parts of the developing world will have even bigger demographic problems than the U.S. As of 2050, Brazil’s dependency ratio will rival that of the U.S., while the populations of China and Taiwan will be even more skewed toward the elderly. But for now, most developing nations have young populations and the potential for vigorous economic growth. This is the reason I’m so enthusiastic about emerging market stock funds, such as the index funds available from Fidelity Investments, iShares, Charles Schwab and Vanguard Group. An added reason: Emerging stock markets are significantly cheaper than stocks in developed nations based on the full range of valuation measures—price/earnings ratios, Shiller P/E, dividend yields, share price-to-sales, you name it. Want to learn more about all of this? Check out the work of Rob Arnott, chairman of money manager Research Affiliates. Back in 2003, he co-authored an excellent paper on the topic. His website also has a section packed with intriguing demographic data, as well as a six-minute video that summarizes his views.

My Bubble

THEY’RE QUESTIONS all of us have asked in recent years: How can anybody believe that? How could they possibly behave that way? I’m not talking about the behavior and beliefs of politicians, actors and sports stars, as well as that of their supporters and detractors. Rather, I’m thinking about other people’s finances. Like everybody else, I live in a bubble—and it’s a struggle to understand the behavior and beliefs of many of my fellow Americans:

• Increasingly, I find it hard to appreciate how baffling money is to so many people. It seems so simple to me: You spend less than you earn, stick the excess in a few low-cost mutual funds, buy a minimal amount of insurance, limit your debts and take a few basic estate planning steps. But none of this seems simple to most folks.
• I’ve slowly lost touch with the financial struggles of many Americans. Just as I find it hard to recall how baffling the world of money once seemed, I’m now far removed from my 20s, when making ends meet was a weekly juggling act.
• I live in an investment world where the overriding concern is capturing market returns as cheaply and tax-efficiently as possible. What about the testosterone-infused pursuit of market-beating gains? Why would anybody waste their time and money on that?
• I’ve lost almost all desire to acquire new possessions. When I see folks with designer handbags or luxury cars, I am—more anything—puzzled. What’s to get excited about? Don’t they realize that, a few years from now, those will be nothing more than scuffed-up used goods?

To counteract all of this, I pay close attention to financial statistics and have turned them into a regular feature on HumbleDollar’s homepage. But mostly, I’ve been spending more time talking to folks about their finances—and trying to put myself in their shoes.

May’s Greatest Hits

HERE ARE THE SEVEN most popular blogs published by HumbleDollar last month:

• Where’s the Party?
• Four Numbers
• My Five Mistakes
• Bad Idea for Rent
• Old Story
• Age-Old Myths
• All Thumbs

Last month also saw heavy traffic for May’s newsletter and for a blog published in late April, How About Later? Follow Jonathan on Twitter @ClementsMoney and on Facebook.