Managing the demographic risk of an aging population

One trend that has been largely overlooked by the movers and shakers is our aging population. It is one of the forces that will shape society and the global economy over the next decades and governments need to adjust their policies accordingly.

Around the world, workforces are steadily aging. Among the key drivers of a rapidly aging population are declining fertility rates, increased longevity, and the decline in mortality rates. For example, retiring baby boomers in the United States will live longer, but there will not be enough new births to offset the surge in the ranks of the elderly.

The world’s fertility rate fell from five children per woman in 1950 to roughly 2.5 today and is projected to drop to two by 2050. This decline has been the result of such factors as the rising social status of women and their increased participation in the workforce, widespread availability of birth control, and the increasing costs of raising children.

On the other hand, global life expectancy has increased from 50.09 years in 1960 to 72.6 years in 2019 and is expected to rise to 75 years by 2050. In the United States, life expectancy is projected to increase by about six years from 79.7 in 2017 to 85.6 in 2060. By 2035, there will be more people in the U.S. aged 65 and over than there will be children under 18, according to the Gerontology Institute at the McCormack School of Policy and Global Studies at UMass Boston.

The reasons for increased longevity include advances in health care, increased emphasis on personal and social hygiene, and increased government programs for the elderly.

In the developed world, the ratio of dependents to workers is rising sharply as baby boomers retire. Retirees are not only living longer but are increasingly prone to dementia at older ages. As the CEO of Dana-Farber Harvard Cancer Center said, one out of three people who reach 85 will have Alzheimer’s. This is a group largely dependent on others to help with daily living. As the need for caregivers intensifies, there will be fewer workers available for other work.

A rising dependency ratio is inflationary because dependents consume but do not produce. The growth in retirees may trigger a vicious cycle of slower economic growth and higher taxes. Going forward, policy makers should consider a progressive decline in the size of the labor force.

With fewer people producing goods and services and significantly more non-working people consuming them, global supply will tend to lag demand. Combined with a greater bargaining power of the workforce in wage negotiations, this may increase inflation.

Meanwhile, workers are likely to consume more as a labor shortage pushes up wages. Investment will rise in advanced countries as companies substitute capital for more expensive labor. Rising wages may improve the galloping inequality gap.

Despite these facts, many business leaders and policymakers don’t have a good grasp of the realities of an aging population and the economic challenge it will pose. Aging populations increase the financial burden on governments, creating a pension time bomb, and increasing demands on health care and elderly care systems.

But these outcomes are not inevitable. Greater longevity presents individuals, employers, and policy makers with opportunities to help the elderly live more purposeful lives. Policy makers should take steps to harness the productive potential of older people. For example, by promoting an education policy that includes a strategy for supporting lifetime skill formation.

The famous maxim that “demography is destiny” may or may not be attributable to Auguste Comte, the 19th century French sociologist. But it was certainly true that it was Comte who first wrote about how population trends could determine the future of a country.

What is not true is that destiny is not susceptible to change. Just as societies must adjust their lifestyles to adapt to climate change, societies with aging populations must adjust their policies to promote economic growth.

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