As countries age, through both increases in the elderly population and decreases in the young population, they may face lower economic growth, according to a recent Economic Synopses essay.
Economist Ana Maria Santacreu first discussed the aging of G-7 countries in a blog post a few weeks ago. She examined the age-dependency ratio, which is the sum of the young (under 15) and elderly (over 64) populations relative to the working-age (15 to 64) population.
All seven countries saw increases in this ratio over the past 10 years, as the elderly populations have increased while the working-age and young populations have decreased slightly or remained flat. (For figures showing these trends, see the blog post “How Are Populations Shifting within Developed Countries?”)
In her follow-up essay, Santacreu examined potential long-term economic consequences of high age-dependency ratios.
Santacreu noted that workers tend to save more as they get close to retirement. An increase in savings could, in turn, decrease long-term interest rates. She wrote: “Eventually, as the elderly start retiring and birth rates start decreasing—as appears to be the recent trend—savings would start decreasing and long-term interest rates would rise. Thus, recent demographic changes could affect saving rates and long-term interest rates.”
Speaking of saving, Santacreu noted that a decrease in savings could mean fewer funds to finance investment projects, which may reduce long-term economic growth.
When discussing the potential effect on housing, Santacreu cited an article showing that house prices fell by 0.2 percent per year as age-dependency ratios increased in a sample of 10 countries.1 She wrote: “Because the demographic composition of the labor force contributes strongly to the trend in house prices, fewer young people, together with a large increase in the elderly population, would likely result in less investment in the housing market.”
Santacreu noted that an increase in the elderly population could shift consumption from certain goods to health care services and leisure.
She noted that increasing productivity or increasing the labor force participation of the elderly could potentially offset the effects of an increase in the age-dependency ratio. She wrote: “These economic policies, however, would not reverse the recent demographic trends.”
1 “Vanishing Workers.” The Economist, July 23, 2016.