Major demographic changes are occurring throughout the developed world. Although world population has doubled in the last 50 years and grown almost continuously since at least 10,000 B.C.E., prominent demographers are now projecting a forthcoming peak in world population and a subsequent decline. The United Nations estimates the peak will come around 2100 while a group at the University of Washington says it will happen around 2060. Though skepticism is appropriate for projections about the distant future, these estimates incorporate large reductions in total fertility rates (TFRs) that have been occurring for years in nearly all the high-income countries in the world, including the United States.

Declining fertility: TFR measures the number of children born to an average woman over her lifetime. A TFR of roughly 2 is necessary for a country to maintain a stable population (in the absence of immigration), with the offspring replacing their mother and father.

The TFR for the United States was 1.7 in 2019, the lowest in U.S. history. This is not a blip; the U.S. TFR has been declining continuously from a peak of 3.7 in 1960, and it has been below 2.0 since 2010. If it continues at this rate or below, the U.S. population will decline unless there is offsetting immigration. This same trend is occurring in other high-income countries around the world.

Slow or declining population growth is new to the United States and to the world. Negative consequences from this demographic shift have already occurred, and the problems will get worse unless there are major reforms in economic policy. The rate of economic growth has already declined in the United States from its earlier 3% to 2%, and the latest Congressional Budget Office (CBO) projection is for 1.6% annual growth over the next 30 years. A total fertility rate below the replacement rate contributes to aging of the population, and a smaller and older population reduces the rate of economic growth. Countries like Japan, Italy, and Russia, which are experiencing decreasing population, have had very little economic growth as a result.

Declining standard of living: A country’s gross domestic product can be expressed as the size of its labor force multiplied by its average productivity of labor. A lower fertility rate lowers the population, which in turn reduces the labor force about 20 years later. A smaller population reduces GDP directly, and aging further reduces GDP by shrinking the size of the labor force. The U.S. labor force participation rate has already decreased from 67% to 63% since 1968.

Aging also reduces labor productivity through various channels. Average health and ability to perform certain tasks decline with age. Labor productivity also declines as economic changes make some previously acquired skills obsolete. All these factors contribute to the CBO’s projection of slower productivity growth in the future.

Aging can reduce the productivity of workers, but it can also reduce the productivity of business firms. A set of relatively inefficient Japanese firms, called “zombies,” contributed to a decade of slow growth in Japan in the 1990s. They were unable to earn enough revenue to service their debts, and they were kept alive by various subsidies from the Japanese government. Similar firms have been identified in the United States, and as the share of zombie firms has increased relative to start-ups, productivity growth has declined. The American zombies have been protected by the government in various ways, including loan guarantees, low interest rates, and Federal Reserve purchases of private assets.

Social Security: Slower population growth reduces economic growth and the standard of living. It also reduces the sustainability of Social Security and other pension plans. Social Security is a pay-as-you-go system in which benefits delivered to retirees in a given year are limited to what the program receives from payroll taxes on current workers in the same year, plus any drawdown in the Social Security Trust Fund. Thus, anything that reduces the future labor force reduces the ability to pay future retiree benefits. Increased longevity of retirees also contributes to the solvency problem of Social Security by increasing total benefits to be paid out.

The 2020 Trustees Report, which came out before the COVID-19 pandemic, projected that the trust fund would be exhausted by 2035. This means projected payroll tax revenue would not be enough to pay the promised benefits to the expected number of retirees in that year. The shortfall would be $6,600 per person, which is about 24% of normal benefits. Anything that would lower revenue or increase promised benefits would cause the fund to be exhausted earlier. Accordingly, in the wake of COVID, the CBO now projects the fund will become insolvent in 2031.

Recent proposals to increase the program’s benefits or reduce its taxes would exacerbate the insolvency problem. A proposal to raise the cap on income subject to the tax would reduce the severity of the insolvency problem.

Social Security’s insolvency problem is well known, but Congress stubbornly refuses to make reforms that would increase its revenues relative to its benefits. Reform faces strong opposition, but Congress did implement reforms in the past, when the program faced the same problem of benefits exceeding payroll tax revenue. In 1983, Congress raised payroll taxes and reduced benefits by raising the age at which people qualify for full benefits. The higher ages for eligibility were phased in gradually, so that no one faced a large immediate shock, and subsequent complaints were mild. As a result of those changes, the program began accruing cash surpluses that expanded its trust fund — until recently.

Public pension reform has been difficult to achieve in other countries, but it has happened. Sweden recently implemented a major reform, transforming its system from a defined benefits plan like Social Security to a defined contribution plan in which money is paid into a worker’s retirement account while he is working.

Immigration: For any single country, population growth is affected by immigration as well as the difference between births and deaths in the national population. Thus, immigration policy can offset problems from a low fertility rate. In recent years, immigration has contributed about half of the growth in the U.S. population. The United States is a nation of immigrants, and newcomers have made major contributions to national prosperity. Among recent successful business start-ups are many that were founded or co-founded by immigrants or their children, including Zoom, Amazon, Apple, Google, YouTube, and Tesla. America is fortunate that it attracts many immigrants with varying skills, ranging from people with advanced degrees to people with no more than an elementary education.

Reform of immigration policy is a possible solution to both the problems of slower economic growth and Social Security insolvency. Historically, the United States has received more immigrants than any other country. However, major surges in immigration at different times in U.S. history have brought strong backlashes against accepting additional foreigners. The first surge occurred just before World War I, when the foreign-born share of the U.S. population reached 15%, the highest level in its history. The current backlash against immigration comes as the foreign-born share of the population has risen to nearly 14%. Opposition to immigration contributed to the 2016 electoral success of Donald Trump, the United Kingdom’s “Brexit” from the European Union, and the popularity of other nationalist/​populist governments in Europe. Based on recent restrictions on immigration implemented by the Trump administration, the CBO assumes there will be 2.5 million fewer immigrants in the next decade than it projected a year ago.

Increasing immigration to the United States could offset the negative effects of a low TFR on both the rate of economic growth and the sustainability of Social Security. But opposition to a more liberal immigration policy is strong in the United States and other high-income countries. If U.S. officials follow the backlash against immigrants and impose additional restrictions, that would magnify the negative effects of low fertility. However, obstacles to reform are not insurmountable, as demonstrated by major immigration liberalization in Australia. Australians transformed their immigration policy from one of the most restrictive in the world (the “White Australia” policy) to one that has resulted in one of the highest shares of immigrants of any country in the world.

Conclusion: The significant decline in the U.S. fertility rate has been persistent, and it shows no signs of reversing. The same declines are happening in all the high-income countries of the world. The low fertility rate has negative consequences for the average standard of living in the United States and for the sustainability of Social Security.

If America fails to adapt to the new demographic reality, it will suffer economic losses. However, adverse effects can be avoided if Social Security and immigration policies are reformed to take account of the new and lower fertility rates.