4 Global Economic Issues of an Aging Population

The social and economic implications of an aging population are becoming increasingly apparent in many industrialized nations around the globe. With populations in places such as North America, Western Europe, and Japan aging more rapidly than ever before, policymakers are confronted with several interrelated issues, including a decline in the working-age population, increased health care costs, unsustainable pension commitments, and changing demand drivers within the economy. These issues could significantly undermine the high living standard enjoyed in many advanced economies.

Advanced Industrialized Societies Are Growing Older

As of December 2015, people 65 or older account for more than 20% of the total population in only three countries: Germany, Italy, and Japan. This figure was expected to rise to 13 countries by the year 2020, but it had already reached 17 countries by 2019.

The Decline in the Working-Age Population

A rapidly aging population means there are fewer working-age people in the economy. This leads to a supply shortage of qualified workers, making it more difficult for businesses to fill in-demand roles. An economy that cannot fill in-demand occupations faces adverse consequences, including declining productivity, higher labor costs, delayed business expansion, and reduced international competitiveness. In some instances, a supply shortage may push up wages, thereby causing wage inflation and creating a vicious cycle of price/wage spiral.

To compensate, many countries look to immigration to keep their labor forces well supplied. While countries such as Australia, Canada, and the United Kingdom are attracting more highly skilled immigrants, integrating them into the workforce can be a challenge because domestic employers may not recognize immigrant credentials and work experience, especially if they were obtained in countries outside of North America, Western Europe, and Australia.

Increase in Health Care Costs

Given that demand for healthcare rises with age, countries with rapidly aging populations must allocate more money and resources to their health care systems. Healthcare spending as a share of gross domestic product (GDP) is already high in most advanced economies; one challenge that advanced economies face is to ensure that when they increase spending, healthcare outcomes actually improve.

Additionally, the healthcare sector in many advanced economies faces similar issues, including labor and skills shortages and increased demand for at-home care. All of these cost escalators can make it more difficult for existing systems to handle the increased prevalence of chronic diseases, while also addressing the needs of large and growing senior populations.

Increase in Dependency Ratio

Countries with large elderly populations depend on smaller pools of workers in which to collect taxes to pay for higher health costs, pension benefits, and other publicly funded programs. This is becoming more common in advanced economies where retirees live on fixed incomes with much smaller tax brackets than workers. The combination of lower tax revenue and higher spending commitments on health care, pension. and other benefits is a major concern for advanced industrialized nations.

Changes to the Economy

An economy with a significant share of seniors and retirees has different demand drivers than an economy with a higher birth rate and a larger working-age population. For example, rapidly aging populations tend to have greater demands for health care services and retirement homes. Although this is not necessarily negative, economies may face challenges transitioning to markets that are increasingly driven by goods and services linked to older people. As advanced economies become older over the next 15 years, it remains to be seen whether immigration will fill the voids in sectors left by aging populations or whether the broader economies will have to adjust to changing demographics.