New research from Rainer Kotschy and David Bloom highlights the impact of aging populations on economies.
The inexorable march of population aging is considered the defining demographic phenomenon of the 21st century, reshaping the global landscape. At the forefront of this transformation is a burgeoning body of research delving into the economic ramifications of a graying populace. In a departure from conventional wisdom, the recent study challenges the prevailing narrative, suggesting that the dire predictions based solely on chronological age might be overlooking a crucial factor – the evolving functional capacity of an aging population.
As fertility rates decline, life expectancy rises, and formidable cohorts advance into their twilight years, the repercussions of this demographic shift ripple across health, society, and the economy. Aksoy et al. (2019) and Maestas et al. (2023) have already pointed to a perceptible deceleration in income per capita growth rates, attributing it to population aging. However, the study, spanning a comprehensive dataset of 145 countries from 1950 to 2015 and projecting into the future until 2050, introduces a novel lens to the analysis.
In the investigation, a distinction is made between the conventional measure of working age, hinging on a fixed age range, and a ‘prospective’ approach that factors in expected years of life ahead. This departure from the norm, focusing on functional capacity as opposed to chronological age, offers a more nuanced understanding of the economic consequences of an aging population. It is found that while population aging does exert a contractionary influence on macroeconomic performance, nearly half of the projected slowdown in a model based on chronological age can be offset by improvements in functional capacity linked to increased longevity.
Yet, the devil is in the details. The complex interplay of declining fertility, rising longevity, and the challenges posed by large aging cohorts requires strategic policymaking. Initiatives promoting healthy aging, innovative healthcare, and comprehensive long-term care systems emerge as potential antidotes to the demographic conundrum (Bloom 2022, Kotschy and Bloom 2022).
However, designing effective policies proves to be a labyrinthine task. Retirement behavior, influenced by occupational compositions, underscores the intricate dance between aging, health, technology, and employment (Sauré et al. 2023). While incentivizing later retirement may sustain fiscal viability, it carries redistributive costs, and the creation of age-friendly jobs presents a double-edged sword, leaving segments of the older workforce marginalized (Scott et al. 2022). The relationship between fertility, employment, and the evolving role of women in the workforce further complicates the narrative (Tertilt et al. 2022).
Contrary to the fatalistic view that demographic destiny is inescapable, the study challenges this notion. Drawing on the concept of a ‘demographic dividend,’ which elucidates the economic benefits of age structure changes, the exploration examines how aging, when accompanied by investments in education, technological progress, and initiatives for healthy aging, may not necessarily lead to an unequivocal economic slowdown.
In the empirical growth model, variations in working-age shares, human capital, physical capital, and population health for 145 countries from 1950 to 2015 are scrutinized. The results, projecting income per capita growth until 2050, suggest that the economic consequences of population aging might be less severe than anticipated, particularly when adopting a prospective approach that considers evolving functional capacities.
As the global population continues to age, harnessing demographic headwinds requires a multifaceted approach. Migration, technological innovation, age-friendly employment opportunities, and interventions that enhance functional capacity at older ages can serve as crucial mitigating factors. However, uncertainties loom large, from the pace of technological progress to the specter of climate change and pandemics, necessitating ongoing research and continual data updates to align economic analyses with evolving real-world conditions.
In a world where demography is not destiny, the study invites a reevaluation of the narrative surrounding population aging, urging policymakers and researchers alike to consider the dynamic interplay of functional capacity, longevity, and economic growth in charting the course forward.