New Hampshire s Demographic Challenges. And the Role of State Government

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1 New Hampshire s Demographic Challenges And the Role of State Government Submitted by: Jesse Devitte Mill Duncan Eric Herr, Chair Andy Lietz Donnalee Lozeau Steve Norton Kirsten Scobie Todd Selig February 18, P a g e

2 Executive Summary New Hampshire s future will be shaped in part by its demographic trajectory, in particular the aging of the post war baby boom. As baby boomers retire, the state s prime age working population, age 20 to 64, will begin a steady decline, dropping 50,000 persons from 2010 to 2030, straining already tight labor supplies and restraining economic growth and vitality. Importantly, the effects will be felt unevenly across the state. Projections for Coos County, for example, suggest that the prime working age population will decline by more than 25% by For state government, the effects will be significant: sharp changes in the demands for public services and increasing fiscal pressure as multiple sources of revenue feel the effects of the state s demographic transformation. The impact on business tax revenues alone in 2030 could exceed $20 million. New Hampshire s transformation poses two challenges for state government: Is New Hampshire State Government prepared to effectively anticipate the impact of this transformation on the demand for public sector services and on its fiscal resources? And Should/can state government help shape the state s demographic trajectory to catalyze a better future for New Hampshire? In our view the answer to the first question is no. New Hampshire State Government s two year policy making perspective and processes inhibit its ability to effectively anticipate long term demographic change. But state government can, we believe, reshape New Hampshire s demographic trajectory. Natural population change is largely beyond the reach of state public policy. But, net migration is the demographic reflection of thousands of households voting with their feet, choosing where to live. Because public policy plays a part in those decisions, state government should deliberately make policy choices that will catalyze a better demographic trajectory and a better future for New Hampshire. In brief, we recommend that: 1. State government clearly focus on the New Hampshire s demographic future by adopting net migration objectives and devoting resources to better inform policy makers. 2. The state adopts processes to ensure that long term considerations, including demographic factors, are a systematic part of the development of policy, budgets and programs, e.g., 10 year current service budgets developed every 5 years. 3. That the legislative and executive branches make organizational changes to better manage current diffuse authority over and oversight of policies and programs with significant demographic effects. And 4. That state government commits resources consistent with its net migration objectives. It will be tempting to wait for compelling evidence of fiscal pressure and eroding economic vitality. But baby boomers have already begun to retire. And the linkages between public policy and net migration are slow moving. For policy makers the time to act is now. 2 P a g e

3 The Demographic Foundations of New Hampshire s Future New demographic patterns are propelling New Hampshire toward a future marked by constrained economic growth and greater fiscal pressure on the public sector. Today, New Hampshire is on the cusp of a profound change in its demographic trajectory, driven principally by the aging of the post war baby boom. From 1960 to 1990, New Hampshire s post war baby boom generation entered the work force and aged toward mid-career. At the same time, New Hampshire enjoyed significant in-migration, 13,108 people annually. 1 Together, the aging of the State s post war baby boom and the surge in migration to New Hampshire pushed the state s prime working age populations, ages 20 to 64, up at a 2.6% annual rate, providing the demographic foundation for a period of remarkable economic growth and prosperity for the State. By contrast, as baby boomers hit 65, with the migration surge into the state over, and with New Hampshire s relatively high rates of out-migration continuing, particularly of young adults, New Hampshire s prime working age population is projected to decline 0.3% annually from 2010 to 2030, a drop of more than 2,500 people per year, while the state s senior population climbs almost 12,300 people each year. 2 New Hampshire is past this demographic tipping point; the post war baby boom has already begun to retire. 3 If this demographic trajectory proceeds unchecked, it will mean decades of constrained economic growth, significant shifts in the composition of As the baby boomer generation retires, New Hampshire s prime working age population will begin a long, steady decline, dropping 2,500 people per year from 2010 to That decline is a stark contrast to the 12,215 person annual increase in the prime working age population the state enjoyed from 1960 to the demand for public and private sector goods and services, and a public sector facing fiscal challenges. Despite these demographic projections, New Hampshire s government appears to be waiting for the effects to be undeniable. It is neither taking action to effectively anticipate these demographic changes nor acting as a catalyst for a better demographic future. But the aging, retirement, and mortality of the post war baby boom generation cannot be a surprise. The 1960 to 1990 surge of in-migration ended a quarter of a century ago. And New Hampshire s high rate of outmigration of young adults has persisted. The demographic projections reported above were published by the New Hampshire Office of Energy and Planning in August In September 2012, the New Hampshire Center for Public Policy Studies published From Tailwind to Headwind: New Hampshire s Shifting Economic Trends arguing that the model that defined the state s economy since the 1980 s-consistent 1 US Census Bureau for historical population data throughout this report. 2 New Hampshire Office of Energy and Planning, State Population Projections, August 2013 for all New Hampshire population projections. 3 For a more complete discussion of New Hampshire s demographic future see Dr. Kenneth M. Johnson s New Hampshire Demographic Trends in the Twenty-First Century, May, 2012, and Migration Trends Shifted in 2014, March 2015, University of New Hampshire, Carsey Institute,. 3 P a g e

4 population growth, increased productivity, and a more resilient economy than our competitors-no longer holds. After benefiting from nearly three decades of economic tailwinds, New Hampshire now faces a strong headwind: net out-migration, an aging population and decreased labor productivity. And as recently as December 23, 2015, the cover story for the New Hampshire Business Review was entitled Annual Preview: It s the workforce stupid? with the subtitle Labor shortage is cramping N.H. s economy. There are no surprises in this demographic trajectory. No doubt the two year cycle of New Hampshire politics truncates policy time horizons, allowing the urgent to drive out the important. And, perhaps, having the nation s oldest group of legislators colors policy priorities and choices. No matter the cause, New Hampshire state government appears to be on the sidelines as a profound demographic transformation rolls through the State. Does It Matters? The 2.6% annual growth in the state s prime working age population meant that for three decades ending in 1990 that group rose, on average, by almost 12,000 people annually. Those increases, coupled with rising labor force participation rates, pushed up the work force even faster, fueling employment growth, and driving nearly double-digit annual growth in New Hampshire gross domestic product and personal income, pushing per capita personal income from $2,266 in 1960 to $20,699 in 1990, a 3.1% annual increase adjusted for inflation. 4 Three factors drive New Hampshire s projected demographic transformation: the aging of baby boomers, the absence of an in-migration surge like 1960 to 1990, and continuing high rates of out-migration particularly of young adults. As a consequence, the prime working age population is projected to drop over 2,500 people annually from 2010 to Do such declines matter? Absolutely, they could directly yield a wages and earnings decrease of more than $2.5 billion in 2030 for the prime age working population. 5 That overstates the macroeconomic impact of the aging of boomers because labor force participation rates don t drop to zero at age 65. In fact, labor force participation rates peak at over 70% for the population age 55 to 59, decline by over 15 percentage points for the population age 60 to 64, then drop sharply to 19% for the population age 65 and over. Despite labor force participation rates that decline with age, the surge in New Hampshire s population age 65 and over will be so large from 2010 to 2030, annually adding almost 12,300 seniors, that increases in the work force age 65 and over may well be sufficient to offset, perhaps more than offset, declines the prime age work force. But, workers age 65 and over work 47% fewer hours than their prime working age counterparts. And because their industries and roles change from their prime working years, earnings per hour are lower. As a 4 US Department of Commerce, Bureau of Economic Analysis, Regional Accounts: 5 US Department of Labor, Bureau of Labor Statistics, Employment Projections: for participation rate projections. Average weekly earnings inflated at a 2% annual rate based on US Department of Labor, Bureau of Labor Statistics current data on average weekly wages by state: 4 P a g e

5 consequence, total wages and salaries for New Hampshire workers 65 and over can be expected to increase significantly perhaps by as much as $1.2 billion from 2010 to 2030, but not enough to offset the declines projected for prime working age labor. The combination of a 20 year decline of the prime age work force and an increase in the 65 and over work force is likely to directly reduce 2030 New Hampshire wages and salaries by more than $2.5 billion. A multiplier effect is likely to push the total wages and salaries effect of this demographic swing to closer to $3 billion. But New Hampshire personal income will take a far smaller hit, as pension and social security payments to seniors will rise sharply as baby boomers retire. While the growth of the senior labor force will offset decreases in the prime working age population over these two decades, these two age segments of the labor force attract very different employers. Large pools of potential workers age 65 and over are unlikely to attract young, high growth, technology driven employers. Instead of the virtuous circle of a growing prime working age population, a larger prime working age labor force, more young, high growth companies, more jobs, higher per capita incomes and more in-migration that New Hampshire enjoyed from 1960 to 1990, now New Hampshire risks a downward spiral.shrinking prime working age population, smaller prime age workforce and fewer jobs in high growth industries and companies. 6 The macroeconomic effect of a declining prime working age population is but one dimension of broader demographic challenges facing New Hampshire. Overall, from 2010 to 2030, New Hampshire s population is projected to grow at a 0.7% annual rate, barely one-third the rate of 1960 to Baby boomer retirement means both a decline in the working age population and a tsunami of senior citizens. And continuing low birth rates will yield a stagnant population age 20 years and younger. From 2010 to 2030, the proportion of New Hampshire s population age 65 years and older will double to 28%. In 1990, there were 5.4 people in the prime working age population for every person age 65 and over in New Hampshire. By 2030, that figure drops to 1.8. In 1990 there were 2.5 children and youth per person 65 and over. By 2030 that figure drops to less than 0.8. It is also important to recognize that there is dramatic variety across the state. To illustrate, consider the population projections for Coos and Hillsborough counties for 2010 to 2030: Coos County s total population is projected to decline by 7.9% while Hillsborough County s population is projected to increase by 7.3%. Children and youth and prime working age populations are projected to decline in both counties, but are far more severe in Coos County: in Coos, -28% for children and youth and -26% for the prime working age population vs % for children and youth and -5.2% for prime working age population in Hillsborough. The population aged 65 and over is projected to increase significantly but far more rapidly in Hillsborough, +113% in Hillsborough, vs. +69% in Coos. 6 For a more complete discussion of the impact of demography on New Hampshire s economic future see: the New Hampshire Center for Public Policy Studies From Tailwind to Headwind: New Hampshire s Shifting Economic Trends, September P a g e

6 The number of people in the prime working age population per person 65 and over in both counties is projected to fall by more than half. But in Coos, it is projected to drop to Adjusting for labor force participation and employment rates, this implies that there will be less than one employed prime working age adult for every person age 65 and over. For New Hampshire state government there will be very specific effects. On the demand side, senior services and education will likely be most significantly affected by this demographic transformation. The demand for senior services will no doubt increase dramatically from 2010 to 2030 as the population age 65 and over climbs 2.3 fold. While statewide the demand for public education will remain roughly flat, in some regions, significant declines will create pressure for change. The decline in the prime age State government sources of revenue will also be affected. The largest work force, though partially effect would be on New Hampshire State Government s business tax offset by a significant increase in the number of receipts. Using the earnings impact of the demographic transformation seniors working, will restrain discussed above as a proxy for New Hampshire s business tax bases and economic growth and impact assuming a unitary elasticity for changes in business tax revenue and the state government revenues, tax bases, the effect of the New Hampshire s demographic trajectory could perhaps lowering 2030 reduce business tax receipts by in excess of $20 million in Other business tax revenue by more source of revenue would also be affected by these demographic shifts. than $20 million. Other state Statewide property tax receipts will likely feel the effects of what the New revenue sources could also be Hampshire Center for Public Policy describes as declining home ownership affected by this demographic demand in New Hampshire and a housing supply poorly aligned with transformation, e.g., lower evolving preferences among age groups. 7 The Center goes on to write state property taxes, fuel that This mismatch exists both for aging Baby Boomers and younger taxes, and interest and workers. Older Residents are likely to seek to down-size to smaller living dividend taxes. And the arrangement, yet housing units of 3+ bedrooms far outnumber one- and demand for public sector two-bedroom units in the state. Given the relatively small number of services will be dramatically young households in the state, it s unclear whether the larger units built for impacted. Boomers during their child-rearing years will draw sufficient interest from buyers in future years. New Hampshire s population age 65 and over will account for an increasing share of the driving age population yet they drive 48% fewer miles on average annually than drivers under age 65 and are two-thirds as likely to have drivers licenses as the population under age 65. As a consequence, fuel tax receipts will be affected. And as senior citizens draw down financial assets, the State s interest and dividend tax receipts will be impacted. These forward looking arguments are not intended to be a forecast of New Hampshire s fiscal future. That would require detailed modeling and would still be subject to the natural uncertainties of forecasting. Instead, the point is simply that New Hampshire s demographic trajectory is likely to have 7 New Hampshire Center for Public Policy Studies Housing in NH, Pt 2: Senior Perspectives, April 17, P a g e

7 significant effects on the State, in general, and state government, in particular. Does New Hampshire s demographic transformation matter? Absolutely! Is It Inevitable? The answer is Yes and No. Natural population change, reflecting birth rates, aging, life expectancy, and mortality, is largely knowable and beyond the reach of public policy in the short term. New Hampshire s racial and ethnic mix and projected decline in the number of women in their child bearing years mean relatively low birth rates for the State and at best stagnation of the school age population. The aging of post war baby boomers will produce a silver tsunami and a decline in the work force if nothing else changes. So, yes some Though critical elements of this demographic transformation are virtually locked in, net migration is not. Net migration has swung significantly in the state s history. And in these projections it is expected to account for more than the total increase in the state s population from 2025 to Because net migration is the aggregate effect of thousands of households voting with their feet, it can be impacted by public policy. dimensions of the projected demographic trajectory are virtually inevitable. The good news is that inevitability creates a high level of certainty for public policy makers with respect to some important public sector activities, e.g., future demands for senior services, public education, and medical care. However, other linkages between natural population change and New Hampshire s future are more uncertain. The best example is labor force participation rates. They do change over time as social and cultural norms morph. They fluctuate over the economic cycle. And they are influenced by institutional factors. No doubt, the 36 percentage point drop in labor force participation rates from ages to 65 and over is largely a function of the magic of age 65.Social Security and retirement benefits. There is another element of these demographic projections that is not inevitable: net migration. In 2012, only 42% of New Hampshire s population was born in the state, the 4 th lowest figure among the states. 8 Only Nevada at 25%, Florida at 36%, and Arizona at 38%, all impacted significantly by retirement relocation and Hispanic and Latino migration, reported lower figures. For New Hampshire, net migration has played an important role in the State s past and will shape the State s demographic future. But net migration is a complex story with two headlines: persistent relatively high outmigration of New Hampshire natives, particularly young adults, and spurts of high inmigration. In part, the State s comparatively low figure is a reflection of a 1960 to 1990 surge in migration to New Hampshire. From 1960 to 1990, New Hampshire s average annual population increase was 16,744 people. Migration into New Hampshire from Massachusetts annually averaged 6,447 people and from other locations averaged 6,572 people over that period, accounting for 78% of New Hampshire s total population increase. New Hampshire s non-native population climbed at a 4.1% annual rate over that period. New Hampshire s high percentage of non-native residents underscores that a significant portion of New Hampshire s population is here by choice, not by birth. By contrast, 8 The New York Times, Gregor Aisch, Robert Gelbeloff, and Kevin Quealy, Where We Come from and Where We Went, State by State, August 19, P a g e

8 New Hampshire s native born, resident population rose only 3,726 people per year from 1960 to 1990, because net migration of New Hampshire natives averaged -3,648 people per year and New Hampshire had relatively low birth rates. From 1990 to 2012, however, migration slowed considerably. Net migration to New Hampshire by non-natives dropped to less than 6,600 people per year, half the number averaged from 1960 to Relatively high rates of out-migration for New Hampshire natives however persisted during that period. While net migration is projected to rebound, the turn of the century slowdown suggest that net migration will not return the rates enjoyed during the State s boom years. Any rebound will be critical to the State s demographic future because with birth rates flat and the number of deaths rising as the baby boom generation ages into their 70 s and 80 s, net migration will account for an increasing share of New Hampshire s population growth. In fact, in the population projections reported here, net migration accounts for more than 100% of the increase in New Hampshire s total population from 2020 to The Components of New Hampshire s Population Change: Total NH Population Change 14,364 29,902 29,048 23,157 Births 63,003 64,359 64,590 63,142 Deaths 51,795 56,016 61,712 69,334 Births Less Deaths 11,208 8,343 2,878-6,192 Net Migration 3,154 20,650 26,167 29,379 Net Migration as a %age of The Change in Total Population 22.0% 69.1% 90.1% 126.9% Clearly, net migration will matter to New Hampshire s future but it is not inevitable. Net migration after all is the demographic effect of thousands of households individually voting with their feet, choosing among possible locations. Relative economic opportunity, the cost of living, amenities, culture, the environment, proximity to family, commuting times, aspirations for the next generation, the quality of medical care, and a host of other considerations impact those location decisions. Some of these factors are, over short periods of time, relatively immutable, e.g., the natural environment. Others swing with economic change, like the decline of an industry or market driven shifts in relative energy costs across regions. Still others can be shaped by public policy. So is New Hampshire s demographic trajectory locked in stone? In part yes, but not wholly. Some factors will no doubt swing in New Hampshire s favor over time. Others will swing against the State. Importantly, some can be influenced by public policy. 8 P a g e

9 What Should State Government Do? If New Hampshire State government is to effectively address the consequences of this demographic transformation, it will have to: 1) better anticipate demographic change and 2) deliberately adopt policies and programs that will be a catalyst to a better future. Accomplishing this will require institutional change and policy, program, and resource commitments focused on the level and composition of net migration in New Hampshire. Three institutional changes will be critical to the demographic performance of State Government: First, state government must be better informed about and sharply focused on New Hampshire s demographic future and the relationship between that future and public sector policies and operations. To that end, o New Hampshire state government should adopt specific, long term net migration goals, quantifying both total net migration and, at least, the age composition of net migration. o A senior demographer position or consulting relationship should be added to the Office of Energy and Planning to improve the flow of demographic information to policy makers, including at a minimum preparation of biennial reports on New Hampshire s demographic profile and future trajectory and periodic reports on the demographic implications and effects of state government actions. Second, state government processes should be refined to ensure that long term demographic considerations are a systematic part of the development of policy, budgets, and programs. To that end, as a starting point, o New Hampshire State government should establish a current services budget process that projects the State budget forward for a decade on the basis of current policy, programs, tax rates, service levels, etc, adjusting only for only known external changes, e.g., demographically induced changes in demand for public services and projected effects on State government revenue. o The current biennial budget processes should include information about the expected demographic effects of proposed and finally approved budgets and the impact of demographic factors on budgets, e.g., school enrollments and demands for senior services. Third, the Legislative and Executive Branches should adopt organizational changes to better manage the current diffuse authority over and/or oversight of policies and programs with significant demographic effects. To that end, o The Legislature should empanel a standing Joint Committee on Demography to oversee the demographic implications of proposed and enacted legislation and to monitor operating performance against the state s net migration targets o The Governor s Office should dedicate a senior position either via an addition to staff or a consulting relationship to demographic policy. And o The state should fund a thorough review of the fiscal effects of demographic trends in New Hampshire. 9 P a g e

10 Institutional change that effectively focuses policymaking and policy makers on New Hampshire s demographic future is necessary but not sufficient. That alone will not change the state s demographic trajectory. A state government commitment to specific net migration targets will be a useful, necessary first step. But only when that commitment includes real investment, real resources, and real changes in policy and programs can state government catalyze a different demographic future for New Hampshire. Hard choices will be required involving for example intergenerational transfers e.g., how much to invest in senior services vs. public education and which prime working years population segments should be targeted, or whether to invest in the State s most demographically challenged regions or in regions yielding the highest return on investment. If New Hampshire State Government is to effectively anticipate and shape this transformation, it will have be better informed and adopt objectives, notably on net migration, and processes that effectively focus policymaking on the state s demographic future. It will also need to make commit resources to catalyze a better future. Because the immediate object of State demographic policy should be net migration, policy makers must be mindful that they are trying to affect how people vote with their feet.why they choose New Hampshire over Massachusetts, Pennsylvania, California or any other location. Those votes are not earned by marketing slogans and campaigns. If the State is to improve net migration and tilt its age composition toward some younger segments of the prime working age population, it will do so because those households believe that New Hampshire will be a better place to work, to build a career, to live, and to raise a family. If the objective is higher net migration and a tilt toward prime working years, state government policy and resource choices need to reflect those priorities. The time to act is now. Demographic change is inherently slow moving and its effects are realized over extended periods of time, so it will be tempting to defer institutional, policy, and programmatic change until the effects are clear and present. But it is already clear that New Hampshire s demographic future will diverge profoundly from the halcyon decades of the 60 s, 70 s, and 80 s, unless state government acts decisively to change the state s demographic trajectory. That divergent future has already begun; the State is past the tipping point. Because public policy and demography interact so slowly, the time for State Government to act is now. 10 P a g e