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New York -- Buried among the avalanche of Enron-related revelations this past month was a factoid that's ultimately of far more relevance to the U.S. economy's long-term prospects: the U.S. birth rate rose to its highest level in 30 years.

As of 2001, American women were having an average of 2.1 children in their lifetime, the National Center for Health Statistics said last week. That's the first time since 1971 that the birth rate has reached a level high enough to offset deaths.

And as any good economist knows, population growth equals economic growth. Together with productivity, it is one of the two parts of the growth equation.

More important is the question of whether the rate of population growth is strong enough to overcome the feared "aging effect." It's widely believed that the departure of retiring Baby Boomers from the labor force in coming decades, coupled with strides in longevity, will create imbalances that, absent drastic changes to benefits and contributions, will bankrupt Social Security and Medicare. The demographic shifts will create severe labor shortages, the pundits say, leaving a young working minority to support an old retired majority.

Assuming no change to inflows and outflows or to the retirement age, the Social Security Administration projects that the Old-Age, Survivors and Disability Insurance program will begin paying out more benefits than it receives in contributions in 2016 and will run out of funds completely in 2038. Among the many assumptions behind that projection is a birth rate of 1.95. All things being equal, the now higher rate should push that date out a bit.

Still, the new data aren't giving demographers and economists much heart. At best, they put Social Security's day of reckoning back only a couple of years - it would take a much bigger and sustained rise in the birth rate to reverse the aging trend.

Moreover, as many economists point out, other assumptions behind the SSA's projections could be incorrect, and in the other direction.

"I think the real demographic news is that we live longer than the Social Security Administration imagines," said Laurence Kotlikoff, chairman of the economics department at Boston University. "Most think the Social Security Administration is underestimating longevity."

In a paper published in June last year, Kotlikoff estimated that it would take a tax hike of a whopping 68% to get the finances of Social Security and Medicare back into balance. The paper also had this to say:

"Close your eyes and imagine it's 2030. What do you see? A country that's older than present-day Florida, a country where the number of walkers equals the number of strollers, a country with only 15% more workers to pay benefits to 100% more retirees, and a country with high and rising poverty rates among the elderly.

"You see a government in desperate trouble - raising taxes to unprecedented levels, making drastic benefit cuts, cutting domestic government spending to the bone, borrowing far beyond its capacity to repay, and printing lots of money to `meet' its bills. You also see major tax evasion, high and rising rates of inflation, a growing informal sector, a rapidly depreciating currency, large capital outflows, and more people leaving the country than entering the country. In short, you see an America in 2030 that looks a lot like Russia circa today."

Generational/Ethnic Divide

Notwithstanding Kotlikoff's alarming predictions, the latest fertility data do add a fresh political perspective to the heated Social Security debate. For one, they show the number of live births for Hispanic and Asian women rising, with African American numbers falling and white child births holding stable, suggesting that the forthcoming generational divide may also be an ethnic divide. William Beach, Director of the Hertiage Foundation's Center for Data Analysis, says there's a high probability that entitlement programs in 20 years will be financed by Hispanics and will serve whites.

But there's also a more positive spin. The fertility rate is far higher in the U.S. than it is in other industrialized countries and has been for many years. "That has very important implications for long term aging and Social Security in that other industrialized countries are in far more severe situations," says Ronald Lee, head of the Center for Demography at the University of California at Berkeley.

In a relative sense, that should make U.S. assets and the dollar more attractive than those of the United States' biggest trading partners in the years ahead, even if the best growth plays will be in the populous developing world.

According to United Nations data, Japan has a fertility rate of just 1.3 - assuming stable life expectancies, a number as low as that virtually guarantees population shrinkage, especially given the low rate of immigration intake in Japan. To make matters worse, the collapse in Japan's stock market over the past decade has destroyed massive amounts of wealth needed to sustain retirees in the future.

And it's not just Japan. Germany also has a fertility rate of 1.3 and is hobbled with a broad-based, inflexible pay-as-you-go pension plan that encourages early retirement and which seems destined to put that country's already deteriorating fiscal balances deeper into the red. The presence of a large Catholic population doesn't help, either. Italy and Spain's birth rates are 1.2 and 1.1, respectively. 

Against these numbers, the U.S. looks like a growth haven.

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