The world is undergoing one of the biggest demographic transitions it has ever experienced. About two-thirds of humanity now lives in countries where fertility is too low for each generation to replace itself. The result is rapidly aging workforces in most of the world, and the population in parts of Europe is already shrinking.
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.
A similar demographic shift is underway in Latin America, including in Cuba, Puerto Rico, Costa Rica, and Colombia. Just a few decades ago, these countries had much smaller elderly populations compared to Europe and thus had lower old-age dependency ratios. Now they are catching up with Europe on this measure.
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%.
North America’s population will continue to grow and will age more moderately, mostly because of immigration. In the United States, the old-age dependency ratio is forecast to increase from around 28.8% today to about 34% by 2035. Immigration policy will shape the exact extent of population change and aging in the country.
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.
These are epochal challenges. We cannot afford complacency, but alarmism is not warranted either. Several of the consequences of aging are not as dire as many assume and claim.
Let us start with politics.
Aging shifts the balance of electoral power toward older generations, which complicates the politics of pensions. The stakes are especially high in Italy, Portugal, and Spain, where public pension obligations are ballooning and are expected to exceed 15% of GDP by 2045.
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.
With stagnant or declining populations in Europe and parts of Asia, and a growing young population in Africa, the pressure for international migration will intensify as well. Recent experience suggests that migration could become an even greater source of political tensions. These are valid concerns, but the glass may be more than half full. Aging is accompanied by longer, healthier lives. The prospect of more healthy years extends the horizon of all age groups in society and could become a basis for new coalitions supporting public investments for the present and the future.
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.
We found that these population expansions and growing numbers of younger people in the developing world led to greater domestic conflict and a much higher likelihood of civil war. Competition and conflict over resources were fierce.
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
When larger populations compete for the same resources, existing fault lines in a society are exacerbated. In many of these countries in the 1950s and 1960s, investment and resources did not keep up with the growing labor force. As my research has documented, the expected economic dividend from better health and a larger population did not materialize, and most of these countries experienced a slowdown in their per capita income growth.
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.
Economic responses were varied. In my research with the economist Pascual Restrepo, we found that countries undergoing faster aging invested more in technologies such as automated machinery, which ameliorated worker shortages and boosted productivity. Several industries including automobiles, chemical manufacturing, and machine-tool production, once heavily reliant on able-bodied prime-age workers, have been at the forefront of installing robots and other new technologies, especially in countries experiencing rapid aging. It is partly for this reason that economies with the greatest labor scarcities––Germany, Japan, and South Korea–– significantly increased their exports in these once labor-intensive industries during the 2000s and 2010s.
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.
A similar pattern appears across labor markets in the United States. Areas where birth rates fell further have experienced similar growth in aggregate earnings and consequently much higher wage growth for workers. Rising (per capita) incomes can also facilitate new compromises in politics. Sluggish real wage growth has been one of the reasons why people throughout the industrialized world have turned to anti-establishment parties. A robust economy that needs labor and offers workers new, well-paid jobs could reverse this dynamic.
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.
Countries also need institutional strength. A major challenge is the growing strain that demographic change places on political and economic institutions. New technologies often take hold through new firms, but those firms may struggle to gain a foothold in several advanced economies where industrial concentration has risen. Despite the tremendous promise of artificial intelligence, its productivity dividend has yet to materialize. Without a significant contribution from AI, the burden of aging could be much more severe.
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.
The broader social effects could be more complex and bear watching. A shrinking population may change the way people think about the future. In a society with fewer and fewer children, people may become increasingly indifferent to future challenges. That indifference could pose social risks we cannot yet foresee. Strong, flexible institutions may help societies, especially in democracies, articulate and act on new aspirations for the future.
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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