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“Demographic Winter” has severe economic consequences for Maine

As the number of Maine residents continues to decline, the state is staring into a population abyss that could mean the loss of 47,000 working-age people in 10 years and 101,000 workers in 20 years.

The state’s declining population, coupled with a rapidly growing segment of people over 65, has serious economic ramifications for both Maine’s business community and the state government. As younger residents leave Maine and the older generation dies off, businesses will continue to lose employees and customers.

At the same time, Maine’s remaining population will age rapidly and demand more of state government’s dwindling resources.

These startling statistics are included in a new report by The Maine Heritage Policy Center, titled “The Fiscal Costs of Maine’s Demographic Winter.” See the report at www.mainepolicy.org.

Countries such as Japan and Russia are already facing annual declines in population, a trend that has been labeled as “Demographic Winter.” Shrinking populations create formidable headwinds in countries trying to generate sustainable economic growth.

“Now Demographic Winter has arrived on America’s shores, and Maine is the beachhead,” said J. Scott Moody, CEO of MHPC and author of the report. “For Maine’s businesses, Demographic Winter is akin to a slow-moving economic depression as the state shifts from population growth to population decline. Maine’s Demographic Winter will have severe negative economic consequences. ”

Not only will businesses lose the prospects of new employees and new customers, they will also face the loss of existing customers. Meanwhile, Maine’s state government will see a significant spike in Medicaid costs for those over 65. As government expenses skyrocket for those over 65, the taxes paid by that age group will plummet, creating fewer resources to deal with higher demands.

To put Demographic Winter in perspective, consider this: Maine’s natural rate of population growth in 2011 was only 180 people—that means there were only 180 more births than deaths. A linear estimate shows that Maine’s natural rate of population growth may be negative in 2012.

“A negative natural rate of population growth is the very definition of Demographic Winter, and Maine now stands at the edge of the population abyss,” Moody said.

Between 2000 and 2011, the number of people under 18 has declined 11 percent.  At the same time, the number of people over 65 has increased by 18 percent. “In economic terms, this means fewer workers available to businesses and fewer customers to buy their goods and services,” Moody said.

But a shrinking economy not only affects businesses: it will also severely impact the finances of government. The overall costs to government—federal, state and local—increase approximately threefold for people over 65 compared to the cost of those under 18.

While these costs are soaring, the taxes paid by people over 65 plunge by approximately two-thirds, mostly due to declines in payroll and income taxes.

“This, in turn, suggests one potential way to fight back against Demographic Winter,” said Moody. “If income taxes are known to decline along with the size of Maine’s workforce, policymakers should proactively begin reducing Maine’s income tax now in order to spark new economic growth and jobs. A growing economy and job base will encourage the in-migration of young families and slow the onset of Demographic Winter in order to find a permanent solution.”

The Cause of Maine’s Demographic Winter

Maine’s Demographic Winter did not happen overnight; it has been decades in the making. According to the U.S. Census Bureau, Maine has been a net loser of young, single and college-educated people in three of the four national censuses between 1965 and 2000.

“Put simply, these young people were the foundation of Maine’s future families,” Moody said. “It is not much of surprise to see Maine’s birth rate decline along with the state having fewer families in their prime child-bearing years.”

The number of births in Maine has plummeted in just the last two decades. Between 1991 and 2011, the number of births has fallen by 25 percent from 17,070 to 12,868. This 25-percent drop in births occurred at the same time that Maine’s overall population grew by only seven percent.

At the other end of the spectrum, the number of deaths in Maine has increased over the same time. Between 1991 and 2011, the number of deaths increased by 13 percent, rising from 11,197 to 12,688.

However, more telling than the number of births and deaths is the net difference between the two. “In 1991, Maine’s net natural population growth (births minus deaths) was at its peak during this period at 5,873 people—the equivalent of adding the entire population of Rumford,” Moody said.

“By 2011, Maine’s net natural population growth was a mere 180 people—the equivalent of only adding another Grand Lake Stream Plantation,” he said.

This dramatic downshifting in Maine’s natural population growth is a significant contributor to the decline in the number of Mainers under the age of 18.

As a consequence, the Maine Department of Labor is projecting that Maine’s working-age population will shrink by 47,000 people in 10 years and 101,000 people in 20 years.

Additionally, as Maine’s net natural population growth dropped, Maine’s total population growth has become more dependent on people “from away.” Between 1991 and 2011, Maine has historically been a strong net in-migrant state, meaning more people move into the state than move out of it.

In the peak year of in-migration, 2003, Maine had an influx of 9,161 people—the equivalent of adding another Cape Elizabeth. But since 2003, in-migration has significantly trended down so that in 2011 only 72 more people moved into Maine than moved out—the equivalent of adding another Highland Plantation.

The importance of in-migration is seen in the total change in Maine’s population. Between 1991 and 1996, all of Maine’s population increase was due to natural population growth, as Maine was a net out-migrant state in those years.

This reversed after 1996 as in-migration and total population surged, even as net natural population growth dropped below 2,000 people. From 2008 to 2011, in-migration turned to out-migration, which led to an actual decrease in Maine’s total population for the first time since 1967.

Data on “Two Maines” Reveals More Troubling Demographic Picture

The county-level data for 2011 shows there are “two Maines” in regards to Demographic Winter. Generally speaking, the southern coastal counties that define the Portland Metropolitan Statistical Area (Cumberland, York, and Sagadahoc) are faring better than the rest of the state.

While statewide natural population growth increased by 180, natural population change was negative in 11 of Maine’s counties, which collectively lost 775 people (more deaths than births).

At the same time, five counties posted positive natural population growth: they gained 995 people (more births than deaths). “So the statewide average hides the fact that Demographic Winter has already arrived in the vast majority of Maine’s counties,” Moody said.

The county-level migration data shows that in 2011 there was far more intra-state migration than inter-state migration. Ten counties showed net out-migration of 1,781 people, while five counties experienced net in-migration of 1,853 people—Cumberland and York counties accounted for the vast majority of that growth.

“Maine’s internal migration is drawing more people into the Portland Metropolitan Statistical Area and away from the rest of the state,” said Moody. “Overall, the county-level data reveals a picture where the negative impact of Demographic Winter is significantly greater outside of the Portland MSA area.”

The Economic and Fiscal Consequences of Demographic Winter

With a growing population, businesses can plan on new customers simply because there are more people. However, with a shrinking population, businesses not only lose the prospects of new customers, they must also face losing existing customers.  If businesses are unable to find new markets, they will be faced with ongoing declines in revenue or, put simply, an economic depression.

Demographic Winter will also have a negative fiscal impact on federal, state and local governments. First, people over 65 impose significantly more costs to government than their younger counterparts. In fact, a typical person over the age of 65 costs government nearly three times as much for a person under the age of 18—even with educational costs factored in.

While these costs predominantly fall on the federal government in programs such as Social Security and Medicare, Maine’s state government should be prepared for a significant spike in Medicaid costs for those over the age of 65, especially driven by the cost of nursing homes.

Second, while expenses soar for those over 65, the taxes paid by this age cohort drops by two-thirds as shown in Figure 3. The primary culprits for this drop are the payroll and income tax, which naturally decline as people retire from the labor force.

“The primary fiscal concern for Maine’s policymakers moving forward is the eroding income tax base as the state continues to age,” Moody said.

Fighting Maine’s Demographic Winter

There are many reasons, both economic and social, why Maine’s birth rate has declined so precipitously to the point where natural population change may be declining in the near future. Therefore, it is unlikely that a rapid turnaround in the birth rate will occur in time to prevent this decline.

“For the immediate future, policymakers should instead focus on reviving the flow of in-migrants, especially of young people and families,” Moody said. “This will only occur if Maine is creating enough good-paying jobs to draw them to Maine.

“An aging workforce, if left unchecked, will mean ever-declining tax receipts from Maine’s income tax,” said Moody. “Rather than wait for the inevitable, policymakers should proactively phase out the income tax. This would not only help Maine’s small businesses that mostly file through the individual income tax code (sole-proprietorships, partnerships, LLCs, and S-corporations), but would also help young families by lowering their tax bills and put more money in their pockets for diapers, clothes and education.”

A quick glance over the border to New Hampshire, which does not have an income tax, shows the promise of such a plan. New Hampshire is facing the same demographic challenges, although not as severe as in Maine, thanks in large part to a stronger level of in-migration.

Over the last two decades, New Hampshire has seen an influx of 69,487 people versus Maine’s 23,948. Many of those new people were young families, since New Hampshire net natural population growth in 2011 was 3,017 versus Maine’s 180.

“Encouraging strong in-migration will not solve Maine’s Demographic Winter problem by itself,” Moody said. “But, as illustrated by New Hampshire, in-migration can buy some much-needed time to find longer-term solutions. Eliminating Maine’s income tax is an important first step in that process. To do nothing condemns the majority of Maine to living under a never-ending economic depression.”

This story was first published on TheMaineWire.com.

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