An aging global population and its economic implications

An aging global population and its economic implications

Nations will have to make many changes or face slower economic growth and increased social costs to deal with aging populations.

A phenomenon deeply troubling economists and policymakers is the aging global population. This is a major concern since it has numerous global economic and financial implications impacting economic growth, health care costs, and social support systems.

The United Nations projected that by the year 2100 the world’s population will become 11.2 billion and from that 3.2 billion will be at least 60 years old.  Even before that occurs, the Second World Assembly on Aging stated that individuals over 60 years old are beginning to outnumber children under the age of 15, however, developed nations attained this distinction in 1998.

This phenomenon is called “population aging” by demographers. People are living longer due to improvements in global health care and fighting infectious diseases such as polio, malaria, and HIV.  On the positive side, mortality rates are lower than ever before since such diseases can be cured or controlled.  However, this also means lower fertility rates that have been experienced on a historical basis.  With lower child mortality rates, families are shrinking in size since women, on average, will bear two children by 2100 rather than the present two and one-half.

This is part of a longer-term trend in which the number of births dropped from 5.0 children per woman globally in 1955 to 2.7 in 2005.  Combine this with an increase in more people over age 60, then the problem of population aging will only increase over time.  The economic implications of an aging global population have many dimensions that developed and developing nations are trying desperately to confront.

Economic implications

One key economic implication of an aging population is the strain on social insurance programs and pension systems.  With a large increase in an aging population, many nations must raise their budget allocations for social security.  For example, India’s social security system presently covers only 10 percent of its working-age populace, but its system is operating at a deficit with more funds exiting than entering.  In the United States, projections state that the level of social security contributions will start to fall short of legislated benefits this year.

In other words, the amount of money coming into social security will lessen due to fewer contributions from workers and more funds going to an aging retired population.  In Europe, in order to fund their social security system, 24 nations have payroll tax rates equaling or exceeding 20 percent of wages.  The situation is also precarious for pensions.  As the global population for elderly and retired workers increases, pensions must provide more income to these recipients so that they can enjoy at least a reasonable standard of living.

The problem for pensions is the declining number of younger workers thus resulting in lower funds being contributed and necessitating a higher return for their investments.  The problem is compounded when public pension plans in certain nations actually encourage workers to retire early, thus making retiree payouts more expensive than ever before.

Another key economic implication of an aging population is the increase in health care costs.  As the population ages, health generally declines with more medical attention required such as doctor visits, surgery, physical therapy, hospital stays, and prescription medicine.

There are also increased cases of cancer, Alzheimer’s, and cardiovascular problems.  All of this costs money and will increase not only due to rising demand by an aging populace, but also because of inflation.  For example, in the United States, it is projected that public health expenditures will rise from 6.7 percent of GDP in 2010 to 14.9 percent in the year 2050.   This increase in health care costs will mean that nations must put more funds and human resources into providing health care while also attending to the needs of other segments of their people.

With an increasing aged population, there will also be shortages of skilled labor trained to care for aged patients.  It is projected that the registered nurse workforce in the United States will see a decline of nearly 20 percent by 2020 which is below projected requirements.

With an aging global population, economic growth will also be impacted.  Most importantly, there will ultimately be less workers available for firms to make products and provide services.  This shrinking labor force will mean that fewer workers must support greater numbers of retirees since they must pay taxes for social security, health care programs, and public pension benefits.  The global workforce will shrink causing policy and economic concerns.  For example, India is expected to see a 46 percent increase in its working-age population over the next quarter century, however, there will be markedly slower economic growth of only 9 percent over the following 20 years.  In order for India to become a major player in the world economy, it must have a growing and vibrant workforce.

Nations, such as China and Mexico, are expected to witness declines in their workforce from the year 2030 to 2050.  Other large economies such as Japan are projected to see a 19 percent decrease in their worker population within the next 25 years followed by a 24 percent decrease over the next 20 years.  Europe is also expected to see declining numbers in its workforce which will impact their chance to have a growing, competitive economy.

This decline in the global workforce will lead to an increase in the age dependency ratio which is the ratio of working-age to old-age individuals.  Globally, the dependency ratio in 1970 was 10 workers for each individual over age 64, but the expected ratio in 2050 is four workers for each person over 64.

Required change

With an aging population, there is the potential that the world will become a huge nursing home needed to care for more elderly patients.  This will mean a change for many nations in employment practices, pension plan structuring, health care costs, and the economic impact of an aging population.  Nations will have to make many changes or face slower economic growth and increased social costs that they should have dealt with earlier.

Categories: Economics, International

About Author

Arthur Guarino

Arthur Guarino is an assistant professor in the Finance and Economics Department at Rutgers University Business School teaching courses in financial institutions and markets, corporate finance, and financial statement analysis. The first half of his career was spent in the financial services industry. He has written articles dealing with finance, economics, and public policy.