Readers Question: What are the implications of a higher dependency ratio?
A higher dependency ratio means fewer workers supporting more dependants (retired+children). This increases pressure on public finances, raises pension and healthcare costs, and may require higher taxes. Labour shortages and less innovative young people can also slow economic growth. Without policy changes such as higher immigration, later retirement, or more investment in productivity, the burden on the working-age population becomes heavier and long-term growth weaker.
Old Age Dependency Ratio
This measures ratio of old people to working age
This graph shows the ratio of old people (over 65) compared to the working age population 20-64. There is a clear rise in old age dependency across major western economies.
Implications of Higher Dependency Ratio
- Lower Tax Revenues. Retired people pay lower income tax and no national insurance (NI). Therefore, a greater burden falls on the working-age population who need to shoulder a higher tax burden
- Higher Government Spending. The government is committed to paying a state pension and related benefits such as a minimum income guarantee. There are also greater demands for indirect spending on retired people. People over 65 are more likely to require health care treatment, which usually involves a high degree of government spending. Therefore, there are greater demands placed on government spending by a rise in the dependency ratio.
- Potential for higher taxes. The pressures on government finances could lead to higher tax rates on a declining working population, which could create disincentives to work and reduce disposable income. The government may be forced to use collect more revenue from indirect taxes or wealth taxes.
- Lower Pension Funds. Because of the rising % of retired people, pension funds are having to stretch further than before. Many pension funds haven’t planned for the rapid rise in the dependency ratio.
- Pressure to raise the retirement age. Because of the increased cost of pensions, there is pressure to raise the retirement age in both the private sector and public sector. Tesco’s recently announced it will be the first private firm in the UK to raise its pension age to 67. This is an attempt to rein in the costs and meet the pension shortfall they currently have. Raising the state pension age means people will have to work longer than before.
This shows the rise in the male retirement age in the UK. Though it is interesting to note how life expectancy increased much faster than retirement age. - Inequality. Raising the state pension age will have different effects. Some people with a substantial private pension will not be really affected. They can still choose to retire when they want. However, others with no or minimal state pension will have to work longer.
- Competitiveness. If an economy experiences a faster rise in dependency ratio that global average, it could affect its international competitiveness. With a smaller pool of workers and greater tax burden, productivity may be lower and this will lead to a decline in competitiveness.
- Migration pressures. Although migration is controversial, a relative shortage of workers, plus a need to provide more health care and social care for an ageing population may put pressure to fill labour vacancies through the route of migration.
- Public debt. Most major economies are experiencing a rise in government debt as governments struggle to deal with the combination of higher spending, lower tax and lower growth. On current projections, the UK and US will both see a rise in debt, without major policy change.
This shows the rise in the male retirement age in the UK. Though it is interesting to note how life expectancy increased much faster than retirement age.
Pension spending in the UK
UK pension spending doubled in just 15 years.
Forecast health care spending as a share of GDP in the UK. This will be difficult to manage, given the scale of more resources needing to go into health care.
Labour Market Implications
A higher dependency ratio could lead to labour shortages as firms struggle to recruit sufficient numbers of workers. Firms may have to respond by encouraging older workers to stay in work for longer. There may be an increase in ‘semi-retirement’ – where older workers stay in work part-time to supplement smaller pensions.
The impact of an ageing population may be offset by the growth of automation – which increases net productivity. There is a hope that artificial intelligence will boost labour productivity to offset some of the rise in the dependency ratio.
Economic Implications
A higher dependency ratio is likely to reduce productivity growth. A growth in the non-productive population will diminish productive capacity and could lead to a lower long-run trend rate of economic growth. The UK has had a slowdown in productivity growth since 2008, though it is worth pointing out there are many other factors at work. However, in the future an ageing population could exacerbate low productivity growth
Social Implications
The retired population will make up a bigger share of the population. Therefore, they will have a bigger political voice. It may require different attitudes to how we care for old people, e.g. should someone’s house be a mortgage to pay for their healthcare? Should responsibility for looking after old people fall on the state or should private charity and family play a greater role?
Video on Ageing Population
Total Dependency Ratio
The dependency ratio measures the % of dependent people (not of working age) / number of working people.
Children (0-15) + Number of elderly (> 65)
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Number of working age (16-65)
If we include both children and retired as dependents, the situation is slightly different
In the western world, we are seeing an increase in the dependency ratio because the population is living longer. This is creating an increase in the number of people over 65 and higher dependency ratios.
On the other hand, a fall in the fertility rates means that the number of young dependents is slowing down.
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how doese a high dependency ratio affect political aspect
Absolutelly right
What do you think is the effect oa a high countries? In developing countries?