The Economic Impact of Aging

New Report Warns of a Demographic Tax

Rome, (Zenit.org) Father John Flynn, LC | 930 hits

The dramatic aging of the world’s population will impose a “demographic tax” on economic growth over the next two decades, warned a recent report published by Moody’s Investors Service.

The report, titled: "Population Aging Will Dampen Economic Growth over the Next Two Decades," warned that policy reforms and technological progress to improve productivity will be needed to cope with the coming challenge.

"Estimates show that aging will reduce aggregate annual economic growth by 0.4 percentage point in 2014-19 and by a much larger 0.9 percentage point in 2020-25," commented Elena Duggar, Moody's Senior Vice President and one of the authors of the report.

The global working-age population will only grow nearly half as fast from now up to 2030 as it did during the previous 15 years, the report explained.

Aging affects not only developed countries but almost all nations in the world.  With the exception of a small number of countries in Africa all will face either a slower-growing or declining working-age population.

Moody’s expects that the largest decline in growth will be in China, Hong Kong, Korea, and Singapore.

In fact, East Asia, which has enjoyed a favorable demographic situation in past years, is now experiencing a demographic transformation over a much shorter time period than the advanced economies.

“This speed and scale of Asia’s population aging are unprecedented and the experiences of developed countries can provide only limited guidance as to how Asia’s demographic situation will impact its growth potential and government finances,” the report stated.

The transition to an older population will take away from the region one of the main drivers of its past economic success, the report added.

Thus, while Europe and North America face significant aging with the retirement of the post World War II generations East Asian countries also face notable aging pressures.

For example, China will have 6.0 working adults per elderly person in 2020, but by 2030 this will drop to 4.2, and by 2050 will be only 2.6. Hong Kong and Korea face similar problems.

Age and savings

In addition, 16 countries will see a decline of over 10% in their working-age population in the period up to 2030. This includes a number of Eastern European nations, as well as Russia and Germany.

Overall, the working-age population of the world will grow only half as fast, by 13.6%, over the 15-year period from 2015 to 2030, compared to 24.8% from 2000 to 2015, the report noted.

Another effect of aging will be a reduction in household savings rates, which in turn will diminish the funds available for investment. In Japan, for example, the savings rate fell from a peak of 23.2% in 1976 to -0.3% in 2012.

South Korea has also seen a similar turnabout, with the savings rate declining from 25.1% at its peak in 1988 to 5.1% in 2013.

The United Nations, the report explained, defines a society as aging if the elderly – those aged 65 years and over – make up at least 7% of the population. An aged society is one in which the elderly make up at least 14% of the population, and a super-aged is a society where more than 20% are elderly.

Moody’s observed that 68 out of the 112 countries they rate will be classified as aging by 2015, and of them 34 will be aged and 5 super-aged, including Germany, Italy and Japan.

Another eight countries will enter the super-aged category by 2020, with a further eleven joining them by 2025.

Dependency

One of the key indicators of demographic change, the report noted, is the total age dependency ratio, that is, the ratio of people below 15 and over 65 years of age who are dependent, compared to the number of people aged 15-65 who are those classified as being productive.

Overall, by 2050, projections estimate that there will be two working adults for every adult over 65 in developed countries and four working adults for every adult over 65 in the developing world.

There will be considerable regional differences, the report observed. Countries with high unemployment and lower incomes, such as Greece and Portugal, will face greater difficulties than Japan or Germany.

Eastern European countries that have lower levels of income and weak economies will face “a particularly challenging problem,” Moody’s said.

The decline in labor supply can be offset by increased participation of younger workers and women, later retirement, and higher productivity.

In concluding, the report admitted that the relationship between aging and economic growth is complicated with many factors, such as government policy and migration flows, that affect outcomes.

Relatively generous social security and pension systems can lead people to leave the labor force at an earlier age. Nevertheless, changes can be made to increase labor force participation rates and the report singled out Germany as one country that has achieved this.

This latest report confirms previous studies that warn of the serious economic impact of an aging population caused in good part by mistaken population control policies and the promotion of contraceptives and abortion.