Discussion Paper Series 2012-E-11

Macroeconomic Implications of Demographic Changes:A Global Perspective

Ronald Lee

The populations of the World are aging, in both rich and poor countries. Older people work much less than younger adults, and earn far less than their consumption costs. The difference is made up in part by public or private transfers from working age adults, and in part from asset income. As countries grow richer, labor supply at older ages drops while consumption at older ages rises relative to younger, due mainly to the rising costs of publicly provided health care. For these reasons, population aging becomes more costly with economic development. As populations age in the coming decades, support ratios will drop, slowing the growth of per capita consumption by .3% to .8% per year. However, the same processes that lead to population aging also may lead to increased investment in both human capital and in physical and financial assets, raising the capital intensity of the economy and raising labor productivity. The rising labor productivity should offset the declining support ratio, and increased asset income will further offset these declines. However, the extent to which these offsetting processes unfold depends on the institutional structures and public policies that are in place. While population aging will place severe strains on particular public programs, overall, the economic challenges of population aging need not be overwhelming, and need not pose a major threat to economic well-being.

Keywords: population aging; macroeconomic; demographic transition; human capital; economic growth; support ratio; demand for wealth

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2012 Bank of Japan All Rights Reserved.

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