On July 9th, the Organization for Economic Co-operation and Development (OECD) released a striking statistic, reporting that the GDP per capita growth for 36 of its 38 member countries could drop by up to 40 percent by 2060 due to demographic aging; this forecast includes major countries such as the United States, Germany, Japan, the UK, and Australia, to name a few. Without regulatory policy measures, societal changes like declining fertility rates, increased life expectancy, and the retirement of the Baby Boomer generation will contribute to a reshaping of the workforce and impose an economic burden.

What is Demographic Aging?

Throughout human history, populations were young and lived short life spans. Today, humans are living longer, and birth and mortality rates are declining. After undergoing the demographic transition (a four-stage model describing the progressive changes in population growth rates and age structures), the population of older generations has become greater than that of the younger generations. Present in many countries, this modern phenomenon is known as demographic aging: where the population’s median age is shifted towards older individuals. 

In contrast to the propelling effect of lower birth and mortality rates, immigration can contribute to the reversal of demographic aging in a population. With an increase in immigration rates, where immigrants tend to be younger and have higher fertility rates, the aging of a population can be mitigated. Without immigration, however, the aging trend would appear more obvious and drastic.

The United States alone has witnessed the population aged older than 65 grow significantly, existing as approximately 16.8 percent of the U.S. population in 2020. In the future, the U.S. elderly population is projected to reach 23 percent by 2080, while the working age population is expected to shrink from 60 percent in 2005 to 54 percent by 2080. Furthermore, the old-age dependency ratio–the number of individuals aged older than 65 per 100 people of working age (typically defined as 20 to 64 years old)–in OECD countries has spiked from 19 percent in 1980 to 31 percent in 2023 and is estimated to reach 52 percent by 2060. 

With the highest old-age dependency ratio globally, Japan’s ratio of people older than 64 compared to every 100 working-age people surpassed 50 percent in 2021, meaning there are only two working-age individuals for each elderly person. For Italy and Finland, a close second and third, their ratios stand at 37 percent, which equates to three working-age individuals for every elderly person. On an international scale, populations are aging with an old-age dependency ratio of 15 percent in 2021. As these trends evolve toward their predicted values, the economic consequences of demographic aging are becoming more critical to address. 

The Economic Consequences of Demographic Aging

As a result of increased demographic aging, several economic changes occur. First, labour supply, which is driven by population growth, becomes reduced and slows the economy, especially in developed countries. The labor supply becomes significantly affected as the labor force size declines, working-age people reduce the amount they work, and workers can’t be replaced by natural population growth. With a larger elderly population, it becomes necessary to spend more on social security, healthcare and long-term care; with a lesser labor supply, there are fewer tax payers who can contribute funds to such programs, necessitating a higher total cost. 

Secondly, demographic aging contributes to slower labor productivity in several ways. As older workers retire, their years of institutional knowledge, skills, and experience in their sector is taken with them. This loss results in a skill gap that can disrupt operations, efficiency, and, therefore, productivity. Additionally, research has suggested that an older workforce can be less inclined to adopt and integrate new technologies into the workplace, which will hinder innovation and long-term productivity growth. Lastly, as the overall labor force ages, some older workers may continue to work, but often at reduced hours or different occupations, impacting productivity.

Through lower productivity growth, an increased old-age dependency ratio, and increased government debt to pay for programs for the aging population, demographic aging is leading to a lower GDP in many countries. To combat the economic decline, there are several recommendations and policies that can be implemented to mitigate the slower growth.

Policy Recommendations and Solutions

In their Employment Outlook 2025 report, the OECD suggested that reducing the rate of older workers’ labor market departures could significantly reduce the projected loss in GDP per capita growth from demographic aging. It is imperative to promote career mobility for mid-to-older workers in order to sustain lifelong working relationships, ensuring that older workers can utilize their skills and adapt to market needs. The OECD also highlighted the importance of reviving productivity growth, which can be accomplished by integrating AI and digital technologies. 

Furthermore, establishing policies that promote health and education, reform pensions, and address age discrimination can foster a more diverse and skilled workforce. With an older workforce, proofing pensions and social services like healthcare will become necessary to expand years lived in good health. Additionally, research has shown that most government agencies desire to retain older workers in the labor force, but have found difficulty in motivating this demographic to continue working. Thus, institutions with an age-friendly work environment, adaptive training, ergonomics to improve working conditions, and a flexible work environment with rest breaks can incentivize the older population to stay in the workforce. 

Currently, several countries in Europe and Asia have been passing legislation to raise the retirement age in response to demographic shifts. Denmark, for example, is set to raise their retirement age to 70 by 2040. By 2060, the OECD projects that the average retirement age in the EU will be 67 years old–several countries are estimated to reach age 70 and older. By raising the official retirement age, paired with incentives for late retirement, a decline in the GDP can be reduced.

In 2017, Finland launched a successful partial old-age pension where individuals aged 61 and older can draw a portion (25 percent or 50 percent) of their earned pension while still working. This provides workers with greater flexibility in working part-time. The Finnish Centre for Pensions has reported that nearly 21,000 new partial old-age pensions were paid out in Finland in 2023. Lastly, it is important to distinguish between labor participation and labor supply. While labor supply is negatively affected by demographic aging, labor participation can have mixed results, and can, in some cases, help mitigate and reduce the effects of demographic aging. 

Conclusion

Through implementing targeted policies and following the OECD’s recommendations, the economic consequences of demographic aging facing many countries can be mitigated. Looking forward, the economic effects of demographic aging will only intensify if left unaddressed. However, with proactive policies that support the older workforce and prioritize productivity, countries can adapt and thrive through the shift without sacrificing GDP growth.