The Fiscal Consequences of Shrinking and Ageing Populations

Abstract

Declining fertility and increasing longevity will lead to a slower-growing, older world population. The share of the world population older than age 65 could increase from 12% today to 38% by 2100. In most countries, population is projected to peak sometime this century and decline thereafter. These developments would place public finances of countries under pressure. Spending on age-related programs (pensions and health) would rise by 8.3 percentage points of GDP and 11.5 percentage points of GDP in more and less developed countries, respectively, between now and 2100. Projecting demographics is a risky business, and policymakers should be prepared to deal with an even faster transition to declining populations. Given the magnitude of the needed policy response, a multi-pronged approach will be required, including entitlement reform, policies that affect demographics and labor markets, better tax systems, and more efficient public expenditure. In many countries it will be impossible to fully offset the impact of demographics on age-related spending, thus necessitating broader public sector reforms to improve the public finances.