Global population is estimated to reach 7 billion this year.  The United Nations is projecting that global population may reach 15 billion by the end of the century.  This projection is based on population growth continuing at its current growth rate of a shade under 1% per year.  However, extrapolation of the current growth rate is not a reasonable assumption.  Population growth is slowing dramatically almost everywhere, because of falling birthrates.  Demographers expect birthrates to continue to fall.  In all likelihood, global population will peak out sometime over the next 50 years well short of 15 billion.

The demographic transition describes demographics dynamics associated with rising wealth and improved medical care.  In agrarian societies before modern medicine, both birth and death rates were very high.  The first impacts of improved hygiene and medical care are declining infant mortality rates and increased life expectancy.  For both reasons, population growth takes off.  Then, with a lag, comes adjustment downward in the fertility rate.  Women have fewer children, partly because more children survive childhood and partly because fertility is negatively associated with wealth and education.

The process of falling fertility rates is happening everywhere.  In some countries, notably Russia, Japan and Italy, fertility rates have fallen well below replacement rates and population will soon begin to fall.  Even in those parts of the world where fertility rates are still pretty high, like Africa and parts of the Middle East, fertility rates are declining rapidly.  Naturally, it is difficult to say at what levels fertility rates will bottom out, but it is entirely possible that the equilibrium will be below replacement so that global population eventually peaks out and actually begins to fall.  Based on current trends, this could occur as early as 2050, with a world population of about 8-9 billion.

The scenario of declining global population would suggest very different problems from the UN’s 15 billion population scenario.  The problems of resource utilization and commodity shortages, which dominate the UN agenda, would be much smaller.  The problems of providing for an aging population would loom larger and so would government budgetary challenges.  The ratio of working people to non-working people would decline and growth in the standard of living (output/population) would slow relative to the growth in productivity (output/employment). 

If productivity growth is huge, an aging population may not be all that big an issue.  A relatively small working population may be able to produce sufficient goods and services to satisfy everyone’s demands.  This scenario could be achieved by combining a high savings rate with education and innovation, but there would still be problems.  This scenario implies a high tax burden on workers, who are likely to resist the high tax rates and the high savings rates necessary for the transition.

Economic models suggest that savings rates have a life cycle, low for young people and the elderly, and highest during mid-career.  This poses particular problems for the United States.  The U.S. savings rate, which has been quite low for decades, eventually will move even lower, pushed down by its aging population.  To offset this, it would be helpful if more people took on the responsibility of providing for their own retirement and ramp up their planned savings.

Will baby boomers (people born between 1947 and 1964) be able to save more, or is it already too late?  The oldest baby boomers are now reaching retirement age.  It is probably too late for them to build their savings, if they have not already done so.  The solution for them, in many cases, is to work longer.  On the other hand, the youngest baby boomers are still in their 40s and have plenty of time to build their asset portfolios.  Public policy can help in this regard.  For example, substitution of a consumption tax for the current income tax would support higher savings.

As people plan for the future a key assumption is the rate of return that can be expected on risky assets.  Many advisors suggest assuming that a balanced equity and bond portfolio will return approximately 8 percent, consistent with long-term historical trends.  But, historical returns may not be a reliable guide to future returns.  Future returns will be affected by trends in productivity and demographics, among other factors.  Higher savings rates are consistent with rising demands for risky assets and greater asset price appreciation.  Eventually, an aging population will be associated with lower savings rates as people sell assets to fund retirement spending.  This scenario applies today in Europe and will apply to the United States in coming decades.  I think it is prudent to plan for long-term returns somewhat less than historical experience.

To summarize, we will face enormous problems over the next 50 years or so, but they probably will not be the ones we currently expect.  The big problems won’t be overpopulation or running out of resources.  The problems will be dealing with aging populations, finding useful work for young and old people alike, and building retirement security in an era of low investment returns.