Aging Population

An aging population is a population in which the median age is rising and the share of older people is increasing, typically as a result of declining fertility and rising life expectancy. Population aging is a defining demographic trend in many economies, with profound implications for growth, public finances, and the structure of demand.

Demographic Drivers

Population aging results from two forces. Fertility decline reduces the number of young people entering the population, lowering the share of children and raising the average age. Rising life expectancy increases the number and share of older people, as more individuals survive into old age.

The demographic transition, in which societies move from high to low fertility and mortality, drives the process. Countries at different stages of the transition experience aging at different times and at different speeds, with the most advanced economies typically furthest along.

Economic Consequences

Population aging affects the labour force, as the share of the population of working age declines. This reduces the supply of labour and can lower the growth rate of output, unless offset by higher participation, by immigration, or by productivity growth.

Aging also affects saving and investment. Life-cycle considerations imply that older cohorts dissave, potentially reducing national saving and the supply of capital. The effects depend on the behaviour of households, on the design of pension systems, and on the response of policy.

Fiscal Pressures

Aging places pressure on public finances, particularly on pension and health systems. As the number of retirees rises relative to the number of contributors, the cost of pay-as-you-go pensions increases, requiring higher contributions, lower benefits, or transfers from other sources.

Health spending also rises with age, adding to fiscal pressure. The magnitude depends on the design of health systems, on the health of the older population, and on the pace of medical innovation. Reforms to pensions and health systems are central to the response to aging.

Policy Responses

Policy responses include reforms to pension systems, including increases in retirement ages and changes in benefit formulas. Measures to raise labour force participation, particularly among older workers and women, can mitigate the decline in the labour force. Immigration can supplement the workforce, though its effects depend on scale and on the integration of migrants.

Policies to raise productivity, including investment in education and technology, are important because they determine the growth of output per worker, which can offset the effects of a declining workforce. The combination of policies appropriate for a country depends on its demographic trajectory and on its institutional and fiscal circumstances.

Labor Market Effects

Population aging reduces the share of the population of working age, affecting the size of the labour force. The effect on the supply of labour depends on participation rates, which vary with age and with policy. Higher participation among older workers and women can offset part of the decline.

Aging also affects the composition of the labour force and the demand for skills. As the workforce ages, the average level of experience rises, which may raise productivity, while the adaptability of the workforce may decline. The net effect on productivity depends on the nature of the work and on the capacity for retraining.

Saving and Capital Flows

Population aging affects saving through the life-cycle behaviour of households. As the population ages, the share of dissavers rises, potentially reducing national saving and the supply of capital. The effect depends on the behaviour of older households and on the design of pension and health systems.

In an open economy, the effects on saving are transmitted to international capital flows. Countries with aging populations may export capital, while those with younger populations may import it. The resulting patterns of capital flow affect global interest rates and exchange rates.

Innovation and Entrepreneurship

Aging may affect innovation and entrepreneurship, since the rate of new business formation tends to decline with age. The effect on aggregate innovation depends on the contribution of older workers to research and development and on the opportunities for younger workers to contribute.

Policies that support innovation, including investment in education and research, can mitigate the effects of aging on the rate of technological progress. The design of these policies must account for the changing composition of the population.

International Variation

The pace and timing of population aging vary widely across countries. Some economies, including Japan and several European countries, are far advanced, while others, including many developing countries, are earlier in the transition. The variation reflects differences in fertility, mortality, and migration.

The variation has implications for global economic and financial balances. Countries at different stages of the transition experience different patterns of saving, investment, and labour supply, and the resulting imbalances can be substantial. The analysis of these patterns informs the understanding of global capital flows and of the prospects for growth.

Adaptation

Adaptation to aging involves a combination of policies to raise participation, to increase productivity, and to adjust pension and health systems. The design of these policies must balance the objectives of adequacy, sustainability, and equity, and it must be adapted to the circumstances of each country.

The adjustment is likely to be gradual but persistent. The earlier the adjustment begins, the more gradual it can be, and the less disruptive its effects. The analysis of aging and its consequences informs the design of policy and the assessment of the long-run fiscal position.

See also

• Labour economics
• Public finance
• Economic growth