Impact of an Ageing Population

The Impact of an Ageing Population on the Economy

An ageing population means there is a greater percentage of the population over the age of 65. Therefore, it means there is an increase in the dependency ratio, with a smaller percentage of workers supporting a greater number of people in retirement.

Main Impact of an Ageing Population

Increase in the dependency ratio. This means that there will be more people claiming benefits such as state pensions and less people working and paying income taxes

Increased government spending on health care and pensions. Also, those in retirement tend to pay lower income taxes because they are not working. This combination of higher spending committments and lower tax revenue is a source of concern for Western governments - especially those with existing debt issues.

Those in work may have to pay higher taxes. This could create disincentives to work and disincentives for firms to invest, therefore there could be a fall in productivity and growth.

Shortage of workers. An ageing population could lead to a shortage of workers and hence push up wages causing wage inflation. Alternatively, firms may have to respond by encouraging more people to enter the workforce, through offering flexible working practices.

Changing sectors within the economy. An increase in the numbers of retired people will create a bigger market for goods and services linked to older people (e.g. retirement homes)

Evaluation of an Ageing Population

A declining birth rate could mean a smaller number of young people. This will save the government money because young people require education and pay little, if any, taxes.
It depends on health and mobility of an ageing population. If medical science helps people live longer, but with poor mobility, there will be less chance to work. If people live longer and can remain physically active for longer, the adverse impact will be less.
Immigration could be a potential way to defuse the impact of an ageing population because immigration is often from younger people.

Forecast for Dependency Ratios in Different Countries

dependency

Source: Dept for work and Pensions

This shows the extent of the issue, across Western Europe.

Government Responses to an Ageing Population

Increase participation rate. Make it easier for people past 65 to keep working.
Raise the retirement age. The government have already proposed an increase to 67. The retirement age could automatically be linked to life expectancy.
Increase the importance of the private sector in providing pensions and health care. However this may cause increased inequality if people can't afford private pensions.
Increase tax to pay for pension costs. But, many governments already have limited budgets.

More on Policies to deal with ageing population

Essays and Revision Notes on Labour Markets

Flexible Labour Markets

Minimum Wages

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