The Economic Consequences of Population Aging

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Case Details:

Case Code : ECON023
Case Length : 19 Pages
Period : 1960-2007
Pub. Date : 2007
Teaching Note :Not Available
Organization : --
Industry : Miscellaneous
Countries : Worldwide

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Introduction Contd...

The former was due to declines in the marriage rate, increasing numbers of late marriages and increasing incidence of childlessness caused by falling fertility levels, and couples deciding to not bear children either because of financial problems or lifestyle choices, while the latter was the result of improved health care facilities and better nutrition.

The economic effects of an aging population were many; some of these effects have not even been fully studied. However, a major economic fallout of an aging population was a proportionally smaller workforce.

With an increase in the old age dependency ratio (the ratio of number of persons aged 65 and over to the working population⁸) in a country, there would be an increase in the taxes, which would be used to pay out pensions or social security to retired or old people, on the working population, affecting their savings rate. This, together with a drop in consumption, was expected to lead to a decline in economic growth.

An economy with an aging population would also witness a change in consumption patterns, with medical expenses increasing and expenditure on some other products and services seeing a sharp fall.

Some economists, however, believed that at least in the short-term, countries with aging populations would stand to gain as they would experience lower unemployment rates. There were several options available to policy makers to tackle the economic problems arising from an aging population.

Governments could, for example, relax immigration laws so that labor from other countries could enter the country and join the workforce. Some analysts, however, believed that immigration was only a temporary solution. Instead, they favored encouraging women and older people to participate in greater numbers in the workforce.

Overview

The first comprehensive theoretical model on aging population was that developed by Solow and Swan, referred to as Solow-Swan model. Since then there has been considerable academic interest in the concept of aging population and its economic impact. Some analysts see population aging as an indicator of human development...

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8] Those aged between 15 and 65 years. However, there is some disagreement over who constitutes working population. Some economists argue that as several countries have made secondary education compulsory, it is not correct to assume that 15-year olds join the workforce; similarly, the number of people leaving the workforce much before the age of 65 is high.