One way to measure aging is by looking at the old-age dependency ratio, a demographic indicator that captures the number of people in working age (15 to 64) relative to the number of elderly, retired people (64 and older). By 2035, for instance, Italy’s old-age dependency ratio will have risen from an already high 39% to 50%. Greece, Portugal, and Spain are close behind.
In some parts of Asia, demographic concerns are more heightened as populations are expected to age even faster than in Europe and Latin America, especially in China, South Korea, Taiwan, and Thailand. By 2035, the old-age dependency ratio is expected to increase from 21% to almost 34% in China. In Hong Kong, it is expected to exceed 55%.
The implications of this global trend are far-reaching, and for many, simply alarming. As the International Monetary Fund (IMF) puts it starkly: “For those countries where fewer workers are available and labor force participation rates drop, economic output is bound to fall.” Other forecasts warning about pressures on living standards, fiscal problems, and broader social challenges are equally gloomy. And aging will affect politics and social dynamics in various, often unforeseen ways, opening up new fissures in society. Yet demographic change can also create opportunities, especially in societies whose institutions can adapt and that can make the right technological investments.
Let us start with politics.
An aging population could also make it harder for a society to form a consensus on forward-looking investments that may take decades to pay off, such as those necessary for a more complete green transition. Some researchers have pointed to the age divide in the Brexit vote in the United Kingdom. In the 2016 referendum on whether Britain should leave the European Union, most British voters 65 and older chose Leave, while those under 25 overwhelmingly voted Remain.
Younger and expanding populations are no recipe for consensual politics either. I worked with the economists Leopoldo Fergusson and Simon Johnson to study what happened in developing countries in the early decades after World War II as their mortality rates declined sharply. Antibiotics and other new medicines, along with public health campaigns against diseases such as malaria, helped more people survive. More children lived past infancy; populations grew rapidly.
In many newly independent countries with weak institutions, these conflicts turned into long-lasting civil wars that inflicted a grim toll on society and the economy. Ecuador, El Salvador, Guatemala, Peru, and the Philippines all experienced massive increases in their populations between 1940 and 1980, with populations tripling in some cases. Internal conflict became increasingly common. The conflict was exacerbated further when population increases coincided with an abundance of natural resources, as in oil-rich Nigeria, which experienced roughly 150% growth in population between 1940 and 1980.
A path forged by technology
That observation offers a way to think about the complexities that aging and slower population growth bring to the economy. Many commentators, just like the IMF, are convinced that aging and stagnant populations will create a huge economic burden, but the evidence from the past 70 years suggests a more nuanced and more optimistic outlook. When populations surged in several developing nations in the 1950s and 1960s, their GDP did not keep up, and their per capita incomes fell compared to countries with stable populations. Over the last 70 years, where birth rates fell, mostly in the industrialized countries, GDP did not suffer, and per capita incomes grew more rapidly.
My recent work with economists David Autor, Keelan Beirne, and Andrew Scott shows that because of such investments in technology and shifts in the composition of the economy, lower birth rates over the last 70 years have not been associated with slower economic growth. Overall GDP was largely unaffected by falling birth rates, and as a result, lower birth rates translated into significantly higher income per capita.
None of this is reason for complacency. The economic research I have cited so far shows that higher productivity was the result of technological investments and other adjustments. Unless such investments continue as populations age and population growth slows further, there is no guarantee that the past will be a reliable guide for the future.
Institutional adaptation will matter in other areas as well. While higher worker earnings will help shield public revenues against sharp declines, many industrialized economies already have very high levels of public debt and will need to spend more on pensions and health care as their populations age. This may require new coalitions in which younger generations support spending on public services, including pensions and healthcare, while older generations accept certain pension reforms. Even with these challenges, the available evidence does not support alarmism on either the political or the economic front.
Future generations may be smaller, but we still owe it to them to do our best to leave them a healthy, peaceful planet. The choices that will shape that inheritance are already before us. The work must start today.
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