Definition of Dependency Ratio: The dependency ratio measures the % of dependent people (not of working age) / number of people of working age. (economically active)
Dependency Ratio
The dependency ratio shows the number of people who are too young or too old to work compared to those of working age.
Dependency Ratio
- A dependency ratio of 1.2 means that for every 10 workers there are 12 people not of working age.
Old Age Dependency Ratio
The ratio of old people over 65 / number of working age population
For example in the UK (2025) here are roughly 13 million people aged 65 and over supported by about 42 million people of working age — which means an old-age dependency ratio of 31 older people for every 100 workers.
This is just the ratio of retired/people of working age
For example, the OECD produce data on the old people dependency ratio
The Real Dependency Ratio
The real (or effective) dependency ratio looks at the ratio of economically active workers compared to inactive. The effective dependency ratio doesn’t just look at the age profile but, whether people are economically active or not.
For example, many people aged 16-65 are effectively economically inactive, including:
- Students
- People on sickness and disability allowance
- Long-term unemployed (given up looking for work)
- Early retirement
- Mothers (or fathers) looking after children at home
Note: The unemployed are still counted as economically active – if they are actively seeking work. However, if they have given up looking for work, then they are counted as inactive.
- Similarly, some people over 65 may still be working.
The definition of economically active is not always clear-cut (e.g. a part-time worker over 65 is something of a grey area.)
Impact of Female Participation on Effective Dependency Ratios
Many in Europe are concerned about an increase in the dependency ratio. e.g. The dependency ratio in the UK is forecast to rise from 0.34 to 0.65 by 2040. However, it is worth bearing in mind that this rise in dependency ratio is partly offset by:
- Rising female participation in the labour market
- Smaller % of people under 18.
- Proposed rise in the pension age.
Importance of the Dependency Ratio
The dependency ratio is important because it shows the ratio of economically inactive compared to economically active. Economically active will pay much more income tax, corporation tax, and, to a lesser extent, more sales and VAT taxes.
The economically inactive under 16 and over 65 also tend to be bigger recipients of government spending e.g. education, pensions and healthcare.
An increase in the dependency ratio can cause fiscal problems for the government. For example, Italy already has a national debt of over 100%, a doubling of the dependency ratio is going to cause difficult choices for government to make.
Dependency Ratio in the US
Graph showing forecast rise in dependency ratio in the US
The weighted dependency support ratio
This takes into account that people over 65, tend to require higher government spending than children under 16. (e.g. old people require more health care spending). Therefore, the weighted support ratio gives a higher weighting to dependents over 65.
According to research by The Federal Reserve [link]The dependency ratio in 2005 was 0.63. This is forecast to fall to 0.53 by 2080.
European Dependency Ratio
In other European countries, the dependency ratios are expected to rise at a faster rate. Not only are there an increasing number of people over 65, but, also a decline in the number of people of working age.
In Italy for example, the number of workers aged 15-59 is expected to fall from 35m to 21.6m. This will lead a higher dependency ratio. [Source FT 5/12/03]
Forecast for Dependency Ratios in Different Countries
Source: Dept for work and Pensions
Sources: For non-EU countries, Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: the 2004 revision; for EU counties, Ageing Society Indicators, EUROSTAT 2005.
Link to Fertility Rates
The big drop in fertility rates starting at the end of the 1960s, has led to lower birth rates and fewer births. The replacement rate is usually estimated to be 2.1. So if you have a fertility rate of less than that, then over time you will get an inverted population pyramid and therefore rise in dependency ratio.
What society will look like in the future.
Solutions to higher dependency ratios
As dependency ratios rise, some solutions include:
- Raising retirement age in line with longer life spans
- Encouraging immigration of people in early 20s and 30s.
- Reducing the real value of state pension and encouraging people to take out private pensions.
- Raise income taxes to be able to afford pension and health care spending.
- Economic growth enables higher tax revenue from the same tax rates.
What happens when population falls?
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