What Aging Populations Mean For Economies

By Martha Wyatt-Luth | February 24, 2022

Everyone knows the saying that time is priceless. But is it? In an age of increasing longevity, it’s important to understand the financial implications of aging populations. This is already beginning to impact economies on a macro as well as on a micro-scale. Whether that be the target demographics for new companies or the change in how people need to finance their livelihood.

There is no doubt that the more years we live, the more expensive our lives will become. In Lynda Gratton and Andrew J. Scott’s book, “The 100-Year-Life” there is a serious discussion on how unaffordable a longer life may become for some people. People may need to work longer hours for a larger portion of their life in order to afford housing and eventually retirement of some sort if they can afford such a luxury.

In a way, the “gift of a long life” becomes a curse. This may also mean that close quarters during quarantine may become normal such as college grads moving back home or grandparents moving into their children's homes. There is also a probability that state pensions will decrease. Currently, many people receive pensions when they retire from a job based on a formula that expects the tax base to cover the expense of the pensions. However, with aging populations and declining birth rates, the tax base is shrinking. Eventually, there won’t be enough money from taxes to afford everyone’s pensions unless the pensions begin to decrease.

In addition, Economists believe that as populations age, GDP growth will slow down, thereby putting pressure again on government budgeting. Less money coming in means less money the government can spend on health care, infrastructure spending, government salaries, and more. According to the IMF, the working-force population in Europe will “fall more than 20 percent between 2015 and 2055, with an attendant decline in GDP growth.” So how are governments, companies, or individuals trying to combat this?

In a way to make up for this, the company’s of these employees have to decrease their own pension plans. Because of this unreliability for financial security from the state and private companies, individuals have to save more themselves. What will this mean for an individual’s discretionary income? One must consider the fact that children and the elderly consume more than they produce. And if this part of the population continues to rise in comparison to the workforce, the ratio of consumption to production will increase. However, in the majority of countries, the birth rate is declining which means that the decline in children may offset the increase in consumption by the elderly. But in general, there is an issue with a lack of production to make up for the high rate of consumption. In fact, IM believes that “by 2050, unless the labor supply increases, consumption must drop by 25 percent in China, 9 percent in the United States, and 13 percent in other high-income countries.” Furthermore, there will be a budgetary crisis for governments that may instigate a recession unless proactive measures are taken.

Taxes will likely be raised in wealthy countries to offset these costs. Individuals will have to work for longer hours for more years. The sectors of employment will likely shift due to the change in workforce demographics, causing individuals to be equipped to handle a variety of tasks. For instance, it is highly probable that the health care sector will grow as more people are concerned for their health and quality of life. Much of manual labor is being phased out with the introduction of technology such as robots. This means there will be a strong emphasis on fields requiring unique human skills such as research, investment, and entrepreneurship.

Whatever may occur, individuals must be prepared to approach lifetime employment with a flexible mindset and broader skill base. This may even indicate the strength of a liberal arts education, as it does promote such a rounded skill base and outlook. The consequences and even benefits of an aging population will begin to show themselves as public policies and the private sector begins to adjust to this age of longevity. Whether you consider it a blessing or a curse, living longer is a reality we all need to brace ourselves for.

Edited by Zachary Elias