. any such declines must be offset by higher domestic saving - including government saving - if domestic investment in plant and equipment and in housing are to be maintained. future labor productivity, however, is determined by more than just saving, investment, and capital intensity. one of the remarkable features of the economy over the past seven years or so has been the acceleration in the pace of innovative use of capital by workers, rather than increases in the amount of capital per worker. indeed, as i pointed out earlier, such innovation accounted for about one - half of the rapid increase in labor productivity that we observed in the late 1990s. therefore, it is important to address the possibility that aging will affect the rate of innovation, either through a rearrangement of existing capital resources or through technological advance. economists understand very little about how technological progress occurs, and research about the effects of aging populations on technological innovation has been sparse. on the one hand, some commentators have worried that an aging population will lead to a less dynamic economy and a lower rate of technological progress ; they cite, for example, the fact that the majority of nobel prizes in the " hard " sciences were awarded for discoveries made by the winners early in their careers. such issues may have less import going forward, however, as most of the aging of the workforce has already occurred. on the other hand, a slowed rate of growth or a decline in the working - age population may raise technological growth. although discovery of new technologies is to some degree a matter of luck, we know that human activities do respond to economic incentives. a relative shortage of workers should increase the incentives for developing labor - saving technologies and may actually spur technological development. economic historians have argued that one reason that the united states surpassed great britain in the early nineteenth century as the leader in technological innovation was the relative scarcity of labor in the united states. patent records of this period show that innovation did respond to economic incentives and that the scarcity of labor clearly provided incentives to develop new methods of production. * * * the aging of the population means that the government will inevitably need to make a number of changes to its retirement programs. these changes in themselves can have profound economic effects. for example, aside from suppressing economic growth, large increases in payroll taxes can exacerbate the problem of reductions in labor supply, whereas policies to promote longer working life can ameliorate it. reductions in benefits - through changes to the age for receiving full retirement benefits or through reforms to slow

the growth of medicare spending or through other means - can affect retirement, the labor force, and saving behavior. in addition, policies that link increases in longevity over time to the eligibility age for social security, and perhaps medicare, may need to be considered. such linkages would help protect the financial and, hence, the economic viability of these programs. the aging of the population is bound to bring with it many changes to our economy - some foreseeable, many probably not. though the challenges here seem great, the necessary adjustments will likely be smaller than those required in most other developed countries. but how we adjust will also matter. early initiatives to address the economic effects of baby - boom retirements could smooth the transition to a new balance between workers and retirees. if we delay, the adjustments could be abrupt and painful. fortunately, the u. s. economy is uniquely well suited to make those adjustments. our open labor markets can adapt to the differing needs and abilities of our older population. our capital markets can allow for the creation and rapid adoption of new labor - saving technologies, and our open society has been receptive to immigrants. all these factors put us in a good position to adjust to the inexorabilities of an aging population.