The rise in elderly dependency ratios is likely to have an adverse impact on economic growth, particularly in countries where the demographic transition is already fairly well entrenched. The imf has estimated that in the developed world, falls in the working-age population could be responsible for reducing annual real gdp per head by an average of half a percentage point by 2050 (although, as the imf points out, this does not mean that real growth will fall by this amount because other factors infl uencing growth will also change over this period and these may more than compensate for the negative demographic effect.)
In parts of the world where the elderly dependency ratio is rising, a larger share of government budgets will have to be allocated to services for older people, such as pension provision and health care. The difficulty encountered by governments seeking to raise the pension age is a sign of the problems that lie ahead. Introducing policies to try to limit the fi scal consequences of ageing populations raises other interesting political questions. The combination of a growing number of older voters and the fact that people over 50 are more likely to exercise their right to vote than younger people will give older people considerable political clout, making it difficult to introduce reforms that will limit their financial benefits. (For a detailed discussion of the growing political clout of the elderly see S.H. Preston’s article “Children and the elderly: Divergent paths for America’s dependents” in Demography.)
An ageing population is likely to have signifi cant financial implications, quite apart from the fiscal consequences of higher pension and health-care costs. The life cycle theory of savings and investment postulates that to try to smooth out consumption over their lifetime, people tend to borrow when they are young, save when they are at the height of their earning capacity in middle age and then run down their savings in old age. In a society with a large proportion of middle-aged people, therefore, the level of savings will be high, driving down interest rates. But in a society with a high elderly dependency ratio the supply of savings will fall, pushing up interest rates.
The rise in the dependency ratio could have a similar effect on stock markets as an ageing population will sell its holding of stocks. Studies of the US stock market, for example, have shown a positive correlation between its performance and the proportion of the population that is at the peak savings period (40–64 years). Although a positive correlation does not necessarily imply causality, there is an intuitive logic behind this relationship.
Some analysts have questioned the assumptions underlying this life cycle of investment and savings, in particular the extent to which old people divest their savings. Uncertainty about life expectancy together with a desire to pass on wealth to future generations is likely, it is argued, to mean that older people will want to retain a proportion of their savings.
But the argument centres on the rate at which savings are used up, not the direction of the trend. Once people retire from paid employment, they are unlikely to be able to continue to build up savings and most will have to dip into them. Therefore in countries with a large and rising elderly population savings will decline.
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