Some Unpleasant Demographic Arithmetic: Part I
We could be at the beginning of a demographic doom loop
At the end of July, St Martin-in-the-Fields High School for Girls will close its doors to all new pupils. The South London school, which has existed for over 300 years, will join Archbishop Tenison's School in neighbouring Oval (founded in 1685), as well as a growing number of schools across the UK in closing down. The common reason for these school closures is not bad management or financial issues, but rather something simultaneously more mundane and alarming: there are simply not enough young pupils in the area to justify their continued existence.
For more or less the entirety of human history, the demographic structure of society has resembled a pyramid; a wide base of plentiful young people supporting a narrower core of the middle-aged and finally topped by a relatively small number of elderly. Due to the combined forces of decreasing fertility and increasing longevity, Western nations are now in the midst of an unprecedented demographic reversal — the age pyramid is becoming a column, or even inverting entirely, with the ratio of the old-to-young set to rise to new heights. It is no hyperbole to state that much of the fabric of modern economies is oriented around the typical pyramidic age structure. The large population of young typically supply labour, produce output, save for retirement and pay taxes, which fund the social security system that partially includes the state pension and other benefits paid to the elderly. This model works well in a pyramid regime, permitting rates of tax to be set at reasonable levels in order to generate the necessary amount of revenue to fund the welfare state and pension system. It is not difficult however to see how this comes under fundamental pressure as the old-age dependency ratio (the ratio of over-65s to the working-age population) rises. Fewer young people are present to start new businesses, innovate and work in occupations requiring physical and mental fitness. At the same time, the required amount of government spending faces natural upward pressure, necessitating high tax rates on the diminished workforce. All else equal, one can easily paint a picture where this demographic shift leads to a fall in GDP growth, a rise in the size of the state, and a change in a wide range of other significant economic and political outcomes. Here I will lay out some of the demographic projections, as well as an initial discussion of some of their major implications. In my next post, I will try to provide some quantitative estimates of these effect sizes, as well as some discussion of the potential demographic doom loop which could emerge.
Demographic Projections
First and foremost, it is worth considering the demographic state of affairs. The primary source of demographic projections is the UN’s World Population Prospects. While these projections are not perfect, due to the fact that assumptions have to be made about future fertility, mortality and immigration rates, population demographics are more deterministic than most variables economists typically deal with, precisely because we know how many people are born today, and can therefore make well-informed estimates about how many people will still be alive from this cohort at any point in the future by applying survival ratios. As an example of this, we knew with reasonably high confidence that the persistent increase in fertility which occurred after World War 2, yielding the Baby Boomer generation, would lead to a large number of old people 70+ years afterwards, which is of course exactly what we have now seen. This was exacerbated by progress in medical technology that led to substantial increases in life expectancy in the second half of the 20th century.
The figures below plot the UN’s projections up to the year 2100 for the UK, the US, China and then across all high-income countries1. The first figure plots the % of the population over 60 in each country both from 1950 - 2023 (which represents data) and from 2024-2100 (which represents a projection). The dotted line separates these two periods:
Over the last 70 years, this fraction has gradually crept up, going from about 16% in the UK in 1950 to about 25% today. A similar dynamic occurred in the US, albeit at a slightly steeper rate due to the lower starting level. However, as the projections illustrate, we are starting to approach a more convex part of this time series, with the rate of increase beginning to rise. In the UK in 2050, it is estimated that 33% of the population will be sexagenarians or older, while by 2100 the estimate is just shy of 40%. The situation is even more pronounced for China, which is facing serious future demographic problems in large part due to its one-child policy. Currently, less than 20% of the Chinese population is over 60, but this may double to 40% as soon as 2050. If we instead look at the projections for the % of the population over 80, we get a very stark picture indeed:
80+ year-olds currently represent 5% of the UK population, but this is forecast to double to 10% before 2050. In the US, it is projected to reach a very similar level. In China, there are currently scant few in this demographic — less than 2.5% in fact — but over the next 25 years, this is expected to quadruple to a tenth of the overall population. It is plausible that many more 60-80-year-olds could work in the future than do currently, but it is hard to envision this for those above the age of 80 unless there are radical innovations which allow this. Furthermore, the age profile of healthcare demand is non-linear, featuring a sharp inflection point at the age of around 75. This is depicted in the below graph from the UKHSA:
Barring revolutionary medical advances, the likelihood of which should certainly not be discounted entirely, far more will have to be spent on healthcare. To the extent this is provided by the government, such as the NHS in the UK, this will also lead to an increase in the size of the state. There is a second impact of this also in the form of more workers and younger family members having to devote larger fractions of their time as caregivers, which further accentuates the labour supply impact on industries which typically offer more potential for productivity growth, i.e. manufacturing or technology. This may represent a sort of Baumol effect, where there is a sectoral reallocation away from high-productivity towards low-productivity industries, as they start to require a larger fraction of the economy’s resources. This effect could worsen the sluggish productivity growth we have seen since the turn of the century, with Western economies experiencing a marked slowdown in this metric. While measuring productivity in the healthcare sector is of course challenging, the measures we do have suggest that its growth has been slow over the last 25 years:
Finally, we can also look at the realised and projected evolution of the ratio of the old-age (60+) population to the working-age (20-60) population:
This is also not a sight for sore eyes, at least from a purely macroeconomic perspective. Currently, there are roughly 2 people of working age for each member of the old-age group in the UK and the US, but in 2050 it is projected that this will fall to 1.5. In China, the ratio is expected to reach parity not long after this point. These dynamics are driven by a combination of the increasing old-age population due to longevity, and the fall in fertility rates that eventually feeds through to a depressed working-age population. An increase in this ratio generates the aforementioned issues, where there is a mismatch between the population working and paying the bulk of the tax revenue, and those who are elderly, primarily not working whilst receiving transfers from the social security system and consuming a large quantity of healthcare services. Here is an estimate of the net fiscal contribution age profile from the ONS that illustrates this:
To be clear, it is wonderful that people are living longer lives and, in many ways, this is a consequence of the successful prolonged economic growth we have experienced. However, the demographic transition clearly poses many challenges for modern economies which will have to be navigated over the next century.
]In Part II I will discuss some quantitative estimates of the effect of an ageing population on GDP growth, asset returns, the size of the state, and other economic variables.
State-contingent Claims
Since I last posted, myself, Paul Beaudry and Franck Portier have a draft out of our paper ‘Some Inference Perils of Imposing a Taylor Rule’. Comments are very welcome of course.
I am off to Sicily next week and thought I would mark the occasion by brushing up on my Mafia history. Previously, my knowledge essentially began and ended with the Godfather films, and so I thought I would pick up ‘Cosa Nostra’ by John Dickie. The book offers a fascinating history of the organisation, and I would recommend it to anyone interested. I also enjoyed some academic work on the economics of the Mafia, including these nice papers by Acemoglu, De Feo and De Luca (2019) and Mirenda, Mocetti and Rizzica (2022).
On the subject of The Godfather, I learned recently the extent to which the studio heads attempted to sabotage the film’s production. Paramount regularly tried to replace Coppola as director, with this plot initially foiled by his Oscar win for writing the script of Patton. Refusing to be cowed, Coppola decided to emulate Michael Corleone and simply fire all of those working on the film plotting against him. Even after this, the studio continued to put pressure on Coppola to make severe changes to the film, criticising everything from the lighting choices to the casting, to the 1940s setting of the film. Thankfully, Coppola ultimately backed himself and refused to implement these. Coppola had full creative control for The Godfather Part II, and once again this paid dividends.
To me, there are lessons to be drawn from this anecdote for the peer review system, which I believe does not consistently lead to improvements in academic papers. Unlike Coppola, those who submit papers to academic journals rarely have the option to refuse to implement the recommendations of reviewers, often to the detriment of the work. Adam Mastroianni has a great piece arguing against the peer review system in general. Amusingly, most academics seem to agree that the system is highly flawed, and yet it persists nonetheless.
I also read Killers of the Flower Moon by David Grann recently in anticipation of the upcoming Scorsese film later this year. It is a good book and I recommend it. The treatment of the Native American population was quite horrendous in the 19th and early 20th Century. I also came across this recent paper by Feir, Gillezeau and Jones (2023) which looks at the long-term impact of the bison slaughter and its effect on the Native Americans. From the abstract:
We demonstrate that the loss of the bison had immediate, negative consequences for the Native Americans who relied on them and ultimately resulted in a permanent reversal of fortunes. Once amongst the tallest people in the world, the generations of bison-reliant people born after the slaughter lost their entire height advantage. By the early twentieth century, child mortality was 16 percentage points higher and the probability of reporting an occupation 19 percentage points lower in bison nations compared to nations that were never reliant on the bison. Throughout the latter half of the twentieth century and into the present, income per capita has remained 25% lower, on average, for bison nations.
I don’t think it has been a great year so far for music. My favourite albums in the first half of the year are Rat Saw God by Wednesday, Fountain Baby by Amaarae, Did You Know That There’s a Tunnel Under Ocean Blvd by Lana Del Rey, and After the Magic by Parannoul.
This is probably my favourite song of the year so far:
I really enjoyed the new Guy Ritchie film ‘The Covenant’ which is on Amazon Prime in the UK. I could probably pick some holes in the film’s overall message on the conflict in Afghanistan, but this aside it is a thoroughly entertaining war film. I think Guy Ritchie is an underrated director, and I would recommend several of his other films including The Gentleman, Wrath of Man and Snatch. The Covenant contains at least two brilliant action set pieces that are a hallmark of Ritchie, and in this particular regard, I would place him up there with the likes of Michael Mann, Ridley Scott and Kathryn Bigelow as one of the genre’s great exponents.
In each case, I use the UN’s ‘medium’ projection scenario.