Economic Effects of an Aging Population

As elderly market will grow bigger, young market will shrink smaller. Population Aging problem should be carefully handle.

At Issue: Population aging is one of the key demographic trends facing the world today. Aging is particularly pronounced in developed countries, with the median age projected to rise to 45 by 2050. What are the economic effects of an aging population? How does increased dependency of elders on working-age adults affect consumption and government finances, today and in the future? This paper sheds light on these pressing issues.

Approach: The author first considers the causes of population aging, examining how they will affect the economy, both today and in the future. He then looks at the means supporting the elderly in their retirement, whether their own savings or transfers from family or from the government. The author draws on existing studies and available data to make theoretical predictions about how these sources of support will be affected by a larger proportion of retirees.

Findings: Longer life expectancy and reduced fertility rates have contributed to population aging, with the latter cause dominating. Lower fertility initially reduces the dependency of the young on working-age adults, increasing the latter’s consumption possibilities. Over time, however, dependency of elders on working-age adults increases, as there are fewer adults entering the workforce. Combined with longer life expectancy, total dependency on adults will rise. This will reduce workers’ incentive to save, since the existence of fewer workers reduces return on investments. It will also strain public finances, as the need to fund social security will lead to higher payroll taxes.

Novelty: Population aging represents a source of potential economic crisis for developed nations. Furthermore, this phenomenon is likely to get worse in the future. The paper paints a stark picture of what we may expect as the elderly become a larger proportion of the population, and provides a complete picture that is lacking in other, less broad studies of this topic. The basic message is clear: with fewer workers supporting more people, something has to be given up.

From: www.smarteconomist.com