Fiscal Impacts of Demographic Transition in Pakistan

Abstract

This study has examined the fiscal impacts of the demographic transition. Declining fertility rate and increasing life expectancy rate are expected to cause ageing in Pakistan. The population projections of United Nation’s World Population Prospects were used, for projecting the labour force, which uses different scenarios to project population namely low variant, medium variant and high variant scenario. The study found that projected labour force is expected to decline under the medium variant scenario. The study examined the impact of expected decline in labour force on output growth of Pakistan using growth accounting technique, and found that under medium variant scenario, Pakistan is expected to face a loss of 4% of GDP at the end of this century. On the expenditure side, this study attempted to measure the impact of demographic transition on pension expenditures. Due to the increase in the proportion of the dependent population pension expenditures are expected to rise from 1.2% of GDP in 2015 to 3.5% of GDP by the end of the century. Due to the increase in old-age dependency ratio and hike in pension expenditures of Pakistan pay-as-you-go pension system is expected to become fiscally unsustainable as fewer workers would be bearing the burden of aged population. This fact advocates transition from pay-as-you-go pension system to fully funded pension system.