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PROJECT: ECONOMY AND THE AGING POPULATION

BL202.2 ECONOMICS MAJOR - II (PRINCIPLES OF MACROECONOMICS)

SUBMITTED BY:
MITHURAJ KALITA
UID NO: SM0123031
SEMESTER 2, YEAR 1

SUBMITTED TO:
Dr. PREETI CHAKRAVARTTY
(FACULTY IN CHARGE)

NATIONAL LAW UNIVERSITY AND JUDICIAL ACADEMY, ASSAM

TABLE OF CONTENTS
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Sl. No. Topics Page number

1. Abstract 3

2. Introduction 4,5

3. Aims and objectives 5

4. Research Methodology 5

5. Chapter 1 - Current demographic trends 5,6,7

6. Chapter 2 - Global economic issues of an aging 7,8,9

population

7. Chapter 3 - Future prospects and policy recommendations 10,11,12

8. Conclusion 12

9. Bibliography 12,13

ABSTRACT
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This project report examines the profound implications of aging populations on economic
development, focusing on prominent examples such as Japan, the United States, and Europe.
With demographic shifts revealing a significant increase in the elderly demographic cohort, this
study delves into the multifaceted challenges this phenomenon poses to economic stability and
growth. Through comprehensive analysis, it becomes evident that aging populations affect
various economic sectors, including labor markets, healthcare systems, and social welfare
structures. Moreover, implications extend to fiscal sustainability, as the burden of supporting
retirees escalates while the working-age population diminishes. However, amidst these
challenges lie opportunities for innovative policy interventions and structural reforms. By
exploring potential strategies such as incentivizing labor force participation, investing in
healthcare infrastructure, and promoting technological advancements, this report offers
actionable recommendations to mitigate the adverse impacts of aging populations and foster
sustainable economic development in the future.

INTRODUCTION
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In 2020, there were 727 million people aged 65 or older. This number is expected to more than
double by 2050.1 The age of advanced industrialized societies is rising. The aging population is a
phenomena that is causing a major upheaval in the demographic landscape of many
industrialized nations. This transformation has repercussions for their economies and cultures.
Relative to the working-age population, the number of elderly persons is rapidly rising in
Western Europe, North America, and Japan. This trend is being driven by factors including
longer life expectancies and lower birth rates. Consequently, decision-makers face a wide range
of intricate issues that demand immediate attention and creative answers.

This project explores the intricate relationship between the economy and the aging population,
delving into this demographic shift's social and economic ramifications. By examining the
multifaceted nature of this issue, from workforce dynamics to healthcare expenditures, pension
systems, and consumption patterns, this study aims to shed light on the looming challenges and
opportunities facing advanced economies.

The implications of an aging population are manifold and profound. One of the primary concerns
is the decline in the working-age population, which can exert significant pressure on labor
markets, productivity levels, and overall economic growth. Moreover, as the elderly population
expands, there is a corresponding increase in demand for healthcare services, leading to
escalating healthcare costs and strain on public finances. Furthermore, because the ratio of
retirees to active contributors skews negatively over time and presents financial difficulties for
both governments and commercial pension providers, the sustainability of pension systems is
questioned.2

Furthermore, the economy's demand drivers and consumption habits are affected by the shifting
demographic environment. Because older people often spend less on products and services than
younger people do, industries that include housing, retail, and leisure may see a shift in the
dynamics that calls for reevaluating investment objectives and business strategies.

In light of this, policymakers are faced with the difficult task of developing all-encompassing
plans to handle the numerous difficulties brought about by population aging while also taking
advantage of the benefits it may bring. Proactive steps are crucial to reduce the negative
consequences and maximize the benefits of an aging population. These might range from putting

1 un_pop_2020_pf_ageing_10_key_messages.pdf,
https://www.un.org/development/desa/pd/sites/www.un.org.development.desa.pd/files/files/documents/
2020/Sep/un_pop_2020_pf_ageing_10_key_messages.pdf (last visited May 1, 2024).
2 Demographic transition, Wikipedia (2024), https://en.wikipedia.org/w/index.php?
title=Demographic_transition&oldid=1218645281 (last visited May 1, 2024).
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laws in place to increase older persons' engagement in the workforce to encouraging innovation
in healthcare delivery and pension reform.

In light of these considerations, this project aims to analyze the intricate interplay between
demographic trends and economic outcomes, offering insights into policy options and best
practices for navigating the complexities of an aging society. By fostering a deeper
understanding of this critical issue, we endeavor to contribute to informed decision-making and
the sustainable development of economies in an era defined by demographic change.

AIMS AND OBJECTIVES:

● To understand the relationship between the aging population and a country's economy.
● To discuss the issues created by an increase in the older population and the economic
development of a country.
● To discuss policies and other recommendations that might be helpful in countering the
economic issues created by an increasing aging population in various countries.

RESEARCH METHODOLOGY

This project analyzed various secondary sources based on a theoretical framework, including
academic articles, journals, and credible websites. Data and findings from the originals were
descriptively analyzed and interpreted to find inferences and conclusions to grasp the topic
thoroughly. A doctrinal research method was adopted for the results.

ANALYSIS:

CHAPTER 1 - CURRENT DEMOGRAPHIC TRENDS

Globally, the population is aging. Due to short lifespans and youthful populations throughout
most of human history, this is a relatively recent demographic phenomena. Two demographic
trends account for a major portion of the aging population. Most obviously, life expectancy has
increased in modern times. A decrease in the birth rate is a second, less evident factor
contributing to population aging. The average age of the population rises when birth rates decline
because younger generations are smaller than older generations. Migration is one of the other
demographic factors that affects aging, but it usually has a lesser impact.3

3 Institute of Medicine (US) Committee on the Long-Run Macroeconomic Effects of the Aging U. S.
Population, Demographic Trends, in Aging and the Macroeconomy: Long-Term Implications of an Older
Population (2012), https://www.ncbi.nlm.nih.gov/books/NBK148831/ (last visited May 7, 2024).
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As observed in the above picture taken from Our World in Data, the old population can be seen
increasing across the world as we move from the 1950s to the 2100s. This trend is observed all
over the world, especially in countries such as the Unites States, Japan and Europian Union
countries. Developed countries with former economic advancements are facing this dire situation
right now. The various causes are listed above. Economists believe that emerging nations like
India, which has one of the greatest youth populations in the world, may find itself in this
situation in the coming years, as evidenced by a number of demographic indices. Economists
believe that emerging nations like India, which has one of the greatest youth populations in the
world, may find itself in this situation in the coming years, as evidenced by a number of
demographic indices.
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The above diagram taken from the Our World in Data sight shows the old age dependency ratio.
This shows the data taken from 2021 which shows that many European and other western
countries are facing a huge crisis of taking care of the old. This phenomena puts significant
burden on the economy. The young workers and tax payers have to take the burden of running
the economy and making it healthy enough to take care of its older citizens through means like
social security, old age homes, pensions etc.

CHAPTER 2 - GLOBAL ECONOMIC ISSUES OF AN AGING POPULATION:

It is quiet evident by now that the increase in the older population of a country beyond a set
amount compared to the young population of the country is harmful from the macroeconomic
and economic welfare standpoint. To address the issue in a more structured way. Here are some
of the most prominent issues in the economy pertaining to the increase in the older population of
the country listed below -

1. The decline in the working-age population:

With fewer individuals of working age available, there's a direct impact on the labor
market. Businesses may struggle to find qualified workers to fill essential roles, leading
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to increased competition for talent and potentially driving up wages. Labor shortages can
hinder productivity and economic growth, particularly in sectors that rely heavily on a
young and dynamic workforce. A smaller working-age population can directly impact
economic output and GDP growth. With fewer workers available to produce goods and
services, overall productivity may decline. This can lead to a slowdown in economic
growth, reduced competitiveness on the global stage, and a diminished capacity to
innovate and invest in future prosperity.

2. Increase in healthcare and social security costs:

A declining working-age population means fewer people contributing to social welfare

programs through taxes and other contributions. This places a heavier burden on the
remaining workforce to support retirees and other non-working segments of the
population. Over time, this strain can threaten the sustainability of social security systems
and government budgets, potentially leading to austerity measures or tax hikes. Declining
numbers of workers relative to retirees can strain pension systems. Pension funds rely on
contributions from current workers to pay benefits to retirees. A shrinking workforce can
lead to funding shortfalls, requiring adjustments to pension schemes or increased
government intervention to ensure retirees receive adequate support. There may be
shortages of healthcare workers and caregivers, leading to longer wait times for medical
services and decreased quality of care for elderly individuals. This can have significant
social and economic ramifications, as the health and well-being of the population are
closely linked to productivity and overall societal stability.

3. Increase in the dependency ratio:

The dependency ratio is the age-population ratio between the productive part, which is ages 15 to
64, and the dependent part, which is ages 0 to 14 and 65 and over, who are normally not in the
labor force. It is employed to gauge the strain on the populace that is producing.

Governments, economists, bankers, business, industry, colleges, and all other significant
economic segments that can profit from knowing the effects of changes in population structure
must take the dependency ratio into consideration. When the dependence ratio is low, there are
enough employed individuals to maintain the dependent population.

Better pensions and health care for citizens might be possible with a lower percentage. A greater
percentage suggests potential political instability as well as increased financial strain on working
people.Although boosting fertility and permitting immigration, particularly of younger workers,
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have been proven measures for reducing dependency ratios, their efficacy may be compromised
by the potential loss of jobs due to automation in the future.4

4. Impact on fiscal policy:

To Understand the impact of an aging population on the fiscal policy of a country. Let us the
take the examples of Japan and Monaco. Japan and Monaco has the world’s most aged
population according to the percentage. Both of these country’s economy continues to suffer
from long term stagnation. Various monetary and fiscal policy have been implimented but it was
only helpful in providing short term relief to the economy.

A law enacted in 1994 in Japan sought to gradually raise the retirement age from 60 to 65 by
2030 and increased pension contributions; another law simplified healthcare and doubled the co-
payment; a benefit scheme for dependency was established in 2000; a pension reserve fund was
established in 2004; an automatic mechanism for below-inflation pension increases was
introduced and later extended in 2016 to account for periods of negative inflation; and finally, a
VAT increase was implemented in 2014, partially to finance the burden of an aging population.

Still, welfare spending has increased at an astounding rate (see Chart 2). In 1970, it made up just
5% of GDP; today, it accounts for 22%. In a nation where the number of pensioners has
skyrocketed (to 22 million in 2000 and 35 million in 2018), and where the average life
expectancy at retirement age is the greatest in the world (22 years), pension spending has
increased the most, by 9.2 percentage points since 1970. Ageing is also responsible for the 4.4
percentage point increase in health spending since 2000, or 70% of the increase overall. Finally,
each year that passes, the 2000-created special social aid system for the aged has a deficit.

It is anticipated that welfare spending will increase further and account for 24% of GDP by 2040.
Public pension spending is predicted to stay in check, but healthcare and dependence spending
will probably keep rising because per capita drug use is 46% higher than the OECD average as
people age.5

CHAPTER 3 - FUTURE PROSPECTS AND POLICY RECOMMENDATIONS:

1. Encouraging immigration and diversity:

4 Dependency ratio, Wikipedia (2024), https://en.wikipedia.org/w/index.php?

title=Dependency_ratio&oldid=1221992846 (last visited May 7, 2024).
5 Economic policies to address population ageing: lessons from Japan, Banque de France,
https://www.banque-france.fr/en/publications-and-statistics/publications/economic-policies-address-
population-ageing-lessons-japan (last visited May 7, 2024).
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Making changes in the policies and hiring immigrants from developing or underdeveloped
countries to tackle the declining number of workforce in the country can be a great way. It not
only helps in the declining workforce and increase in the manpower of the country but also helps
in the import and transfer of skilled labor across the globe. Secondly, immigrants also often help
the economy of a country by engaging in entrepreneurship and innovation invigorating stagnant
industries and creating new job opportunities. Additionally, cultural diversity can enhance
creativity and productivity within workplaces, leading to greater competitiveness in the global
market. Lastly, immigration can alleviate the strain on social welfare systems by enlarging the
contributor base and distributing the burden of supporting retirees more equitably across the
population. Overall, embracing immigration and diversity can bolster economic resilience and
promote sustainable development in the face of demographic challenges.

2. Encouraging healthy aging :

Encouraging healthy aging can have significant positive impacts on both individuals and the
economy. By promoting healthy lifestyles and access to healthcare, societies can prolong
productive years for older adults, thereby maximizing their contributions to the workforce and
society. Healthy aging initiatives can reduce healthcare costs associated with age-related diseases
and disabilities, freeing up resources for other economic priorities. Moreover, healthy older
adults are more likely to remain active consumers, supporting various industries and stimulating
economic growth. Additionally, they can serve as mentors and volunteers, enriching
communities and fostering intergenerational bonds. Overall, investing in initiatives that promote
healthy aging not only enhances individual well-being but also strengthens the economic
resilience of societies by harnessing the potential of aging populations.

3. Promotion of more extended workforce participation:

Promoting extended workforce participation among older adults offers numerous socio-
economic benefits. Firstly, it addresses the challenges posed by aging populations, such as labor
shortages and increased dependency ratios, by maximizing the utilization of human capital. By
extending the working lives of older adults through flexible work arrangements, age-inclusive
hiring practices, and training opportunities, societies can maintain a skilled and experienced
workforce while mitigating potential labor shortages. Additionally, prolonged workforce
participation enhances individuals' financial security, social engagement, and overall well-being,
reducing reliance on public welfare systems and fostering active aging. Moreover, older workers
contribute to economic growth through continued productivity, consumer spending, and
knowledge transfer, driving innovation and competitiveness in the global marketplace. Overall,
promoting extended workforce participation not only strengthens economic resilience but also
promotes social inclusion and intergenerational cohesion, creating a more sustainable and
equitable society.
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4. Encouragement and promotion of marriages and fertility in the country:

Encouraging and promoting marriages and fertility can have significant socio-economic
implications for a country. Firstly, it can help address demographic challenges such as
population aging and declining birth rates, which can strain social welfare systems and hinder
economic growth. By incentivizing marriage and fertility, governments can bolster the size and
composition of the population, ensuring a sustainable workforce to support future generations.
Moreover, increased fertility rates can lead to higher consumer spending, as families invest in
goods and services for their children, stimulating economic activity and job creation.
Additionally, a younger population can contribute to innovation and entrepreneurship, driving
technological advancements and competitiveness in the global market. Furthermore, promoting
marriages and fertility can strengthen social cohesion and familial bonds, fostering a sense of
community and support networks that contribute to overall well-being. To enable people to make
educated decisions about family planning, it is imperative that policies that encourage fertility
are complemented by initiatives that support gender equality, work-life balance, and childcare
infrastructure.6

5. Promoting and rewarding volunteering, care, and artistic work among the elderly

When people are unable to benefit from phased-in retirement because of health problems, duties
to family members, or a mismatch in skills, governments should encourage and reward senior
citizens who volunteer, provide care, or engage in artistic endeavors. These volunteer endeavors
enhance the social fabric, benefit the participants' well-being, boost the economy, and lower
welfare and healthcare expenses.

One of the most significant pro-social activities that has numerous social and personal
advantages is volunteering. For instance, approximately 25% of Americans are volunteers,
putting in 7.9 billion hours and $184 billion in service.

Furthermore, late-life volunteers have reduced rates of death deferral and declining physical and
mental health. National policies ought to encourage, promote, and modify these kinds of chances
for senior citizens due to their advantages. Additionally, older adults who perform caregiving
tasks like meal preparation, cleaning, babysitting, and assistance to the elderly or disabled ought
to be paid for their efforts.

Incentives and encouragement for senior citizens to pursue artistic endeavors such as painting,
music composition, or writing can also benefit society and help to minimize social isolation.
6 Shrinkanomics: Policy Lessons from Japan on Aging – IMF F&D, IMF,
https://www.imf.org/en/Publications/fandd/issues/2020/03/shrinkanomics-policy-lessons-from-japan-on-
population-aging-schneider (last visited May 7, 2024).
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Governments might encourage these kinds of activities by providing funding for senior citizens
to take arts and crafts classes in community centers or social clubs.7

CONCLUSION

In conclusion, the effects of aging populations on economic development are profound and
multifaceted, with implications spanning across various sectors and dimensions of society. As
exemplified by the trends in countries like Japan, the United States, and Europe, demographic
shifts towards an older population pose significant challenges to sustainable economic growth,
including labor market shortages, strains on healthcare systems, and fiscal imbalances. However,
amidst these challenges lie opportunities for innovation and adaptation. By implementing
proactive policies and structural reforms, such as promoting immigration and diversity,
encouraging healthy aging, and supporting extended workforce participation, societies can
mitigate the negative impacts of aging populations and harness the potential of older adults as
valuable contributors to economic prosperity. Moreover, by fostering social inclusion and
intergenerational solidarity, we can create resilient and vibrant communities that thrive in the
face of demographic change. As we navigate the complexities of demographic transitions, it is
imperative for policymakers, businesses, and individuals to collaborate in crafting holistic
solutions that promote inclusive growth and well-being for all members of society, regardless of
age. We can ensure a prosperous future for generations to come through collective action and
forward-thinking strategies.

BIBLIOGRAPHY

● un_pop_2020_pf_ageing_10_key_messages.pdf,
https://www.un.org/development/desa/pd/sites/www.un.org.development.desa.pd/files/files/
documents/2020/Sep/un_pop_2020_pf_ageing_10_key_messages.pdf (last visited May 1, 2024).
● Demographic transition, Wikipedia (2024), https://en.wikipedia.org/w/index.php?
title=Demographic_transition&oldid=1218645281 (last visited May 1, 2024).
● Institute of Medicine (US) Committee on the Long-Run Macroeconomic Effects of the Aging U. S.
Population, Demographic Trends, in Aging and the Macroeconomy: Long-Term Implications of an
Older Population (2012), https://www.ncbi.nlm.nih.gov/books/NBK148831/ (last visited May 7,
2024).
● https://ourworldindata.org/grapher/age-dependency-ratio-of-working-age-
population
● https://ourworldindata.org/global-population-pyramid
● Dependency ratio, Wikipedia (2024), https://en.wikipedia.org/w/index.php?
title=Dependency_ratio&oldid=1221992846 (last visited May 7, 2024).

7 Two solutions to the challenges of population aging, Brookings, https://www.brookings.edu/articles/two-

solutions-to-the-challenges-of-population-aging/ (last visited May 7, 2024).
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● Economic policies to address population ageing: lessons from Japan, Banque de France,
https://www.banque-france.fr/en/publications-and-statistics/publications/economic-policies-
address-population-ageing-lessons-japan (last visited May 7, 2024).
● Two solutions to the challenges of population aging, Brookings,
https://www.brookings.edu/articles/two-solutions-to-the-challenges-of-population-aging/ (last
visited May 7, 2024).
● Shrinkanomics: Policy Lessons from Japan on Aging – IMF F&D, IMF,
https://www.imf.org/en/Publications/fandd/issues/2020/03/shrinkanomics-policy-lessons-from-
japan-on-population-aging-schneider (last visited May 7, 2024).