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Surprise! Can an ageing population spark an economic boom?

Ageing population & economic boom

Experts suggest that health, technology, and preserved wealth can transform an ageing population from an economic challenge into an advantage. The world’s largest economies, including the United States, Europe, Japan, and China, are experiencing a significant increase in their ageing population. Projections indicate that the number of people aged 65 and above will double from 761 million in 2021 to 1.6 billion in 2050 globally.

The Projections

With one in four people in Europe and Northern America projected to be aged 65 or older by 2050. There are concerns about the future of the global economy have arisen. Studies have shown that an ageing society can slow down income growth. However, evidence suggests that maintaining the health of the elderly in advanced economies could mitigate the negative effects of ageing. And also potentially turn it into an advantage.

While an ageing population may lead to a slowdown in gross domestic product (GDP) growth rates. And per capita income, which is more important to individuals, is unlikely to be significantly affected. Technological advancements and increased life expectancy could enhance productivity among the working-age population. And additionally offset losses resulting from a shrinking labor force.

Furthermore, the accumulated wealth of older generations could drive future investments. Achieving these outcomes will require considerable effort. But some countries are already demonstrating how it can be accomplished.

The Scenario Now

Developed nations with ageing populations have enjoyed a favourable demographic situation so far. With a balance between younger and older age groups. However, the working-age population is now plateauing or declining in these countries. Meanwhile, regions like Central, South and West Asia, North Africa, and sub-Saharan Africa will continue to see an increase in their working-age populations until 2045 or 2050.

While the timelines for a declining labour force vary across regions. The consequences will eventually be shared. The working-age population typically produces more than it consumes. Hence, ensuring a surplus to support dependent groups such as children and the elderly. The pressure on the working-age population increases as the number of dependents grows due to population ageing, resulting in a decline in GDP growth rates.

In certain cases, such as China, the impact of this on GDP growth rates can be more pronounced. China’s working-age population is projected to decline by 1 percent annually from 2020 to 2060, compared to an increase of 1.5 percent per year from 1990 to 2015. This decline is estimated to lead to a 2.5 percent decrease in GDP growth rate, even if productivity remains constant.

The Experts’ Opinion

However, economists argue that the GDP growth rate alone does not adequately reflect how an economy is coping with ageing. Per capita income growth is a more important measure of wellbeing, and studies have shown that the effect of an ageing working-age population on per capita income levels is negligible. Factors such as the functional capacity of the workforce and overall productivity play a more significant role.

Economists propose the concept of a second demographic dividend that comes with an ageing population. As the population ages, more individuals have the opportunity to accumulate capital for investment, potentially increasing productivity despite a smaller working-age group. This could be achieved by directing policies toward improving overall productivity through technological advancements.

However, economists caution that countries often fail to effectively utilize their existing working-age populations. High rates of youth unemployment and gendered economic systems, which discourage women’s participation in the workforce, contribute to labor shortages. Encouraging greater participation of women and addressing existing gaps in the labor market can unlock the potential of the working-age population.

In addition to addressing immediate labor shortages, countries must also consider the long-term implications of an ageing population. Governments must strike a balance between the needs of future generations and investing in healthcare and other support systems. Simply raising the retirement age without considering the health consequences or investing in healthcare can lead to adverse effects on individuals’ well-being.

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