Except in Africa and South Asia, the world’s population is aging rapidly. Between 2010 and 2050 the proportion of Americans over 65 will nearly double assuming constant fertility and immigration. By 2034 the Social Security Trust Funds will be depleted.1 By that time there will be two Americans over 65 for every five Americans of working age; if the government taxes earnings on a pay-as-you-go model, the burden on working Americans will be insupportable. The average American family has saved only $96,000 for retirement; more pertinent, the median family has saved just $5,000.2
There is another side to America’s inadequate savings rate, and that is a chronic current account deficit. Countries save by exporting more than they import and saving the balance. The economics literature documents the close relationship between rates of aging, savings, and current account balances.3 Older people lend to younger people to fund retirement, and younger people borrow from older people to start families and build enterprises. Countries with a higher proportion of aging people have a greater need for savings, and typically run a current account surplus with countries that have a younger population. The Nobel laureate Robert Mundell is one of the originators of this thesis. Without exports, we cannot save; with a chronic trade deficit, we cannot help but dissave at exactly the point when we require an increase in savings. Thus America is headed towards a catastrophe. Can it be averted?
The answer is affirmative, but it will require radical changes in U.S. economic policy. Trade competition from Asia in high-value-added manufactured goods presents a different kind of challenge than we have dealt with in the past. China and, to a lesser extent, other Asian competitors employ the full resources of state finances to fund capital-intensive manufacturing investment in the way that the West subsidizes basic infrastructure. In addition, China will commit $1 trillion to building infrastructure overseas to support its foreign trade, including exports as well as raw material supplies. The problem is not merely the dumping of artificially cheap goods into American markets, but a state-supported capital investment program that erodes returns for American investors. As a result, investment in the United States seeks capital-light venues such as software and avoids capital-intensive sectors such as chip production. We are being shut out of the global market for high-tech exports. By no means should we emulate China, whose model suffers from massive inefficiencies as well as suppression of political and economic liberty. But we do need to beat China at its own game, at least in some respects. Although America should not subsidize capital investment; it should subsidize fundamental research that leads to entrepreneurial innovation. And it should work with India, Japan, and other countries that want to resist China’s bid for Asian economic dominance to create markets for American high-tech exports.