The Fiscal Consequences of Shrinking Populations

January 14, 2016 • Daily Email Recap

The Fiscal Consequences of Shrinking Populations

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Shrinking populations pose a formidable fiscal challenge. Declining fertility and increasing longevity will lead to a slower-growing, older world population. In most countries, population is projected by the United Nations (UN) to peak sometime this century and decline thereafter. For the world, the share of the population older than age 65 could increase from 12 percent today to 38 percent by 2100. To some extent, this represents the culmination of a long-term demographic transition associated with technological progress as well as the rise in the demand for human capital which initially boosts populations (as observed for most of human history), but eventually leads to lower fertility. This, in turn, contributes to a more sustainable pattern of development and reduced pressures on the environment.
These developments would place public finances of countries under pressure, through two channels. First, spending on age-related programs (pensions and health) would rise. Without further reforms, these outlays would increase by 9 percentage points of GDP and 11 percentage points of GDP in more and less developed countries, respectively, between now and 2100. The fiscal consequences are potentially dire: such spending increases could lead to unsustainable public debts, require sharp cuts in other spending, or necessitate large tax increases that could stymie economic growth. Second, declining populations can reduce economic growth and-if not accompanied by a commensurate reduction in interest rates-make it more difficult for countries to reduce their public debt as a share of GDP.

Current World Population


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