## _sdn1521 — Executive Summary and Key Findings

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### EXECUTIVE SUMMARY — Major Findings
- Declining fertility and increasing longevity will lead to a slower-growing, older world population; the share of the population older than age 65 could increase from 12 percent today to 38 percent by 2100.
- UN projections indicate population will peak sometime this century and decline thereafter; nearly 70 percent of the more developed countries and about 65 percent of the less developed countries would have shrinking populations by the end of the century.
- Two fiscal channels of pressure:
  - Higher spending on age-related programs (pensions and health).
    - Without further reforms, outlays would increase by 9 percentage points of GDP and 11 percentage points of GDP in more and less developed countries, respectively, between now and 2100.
  - Lower economic growth from declining populations, and—if not matched by lower interest rates—greater difficulty reducing public debt as a share of GDP.
- Demographic projections are highly uncertain; past fertility and mortality have sometimes declined faster than projected, implying large long-term fiscal risks.
- Recommended multi-pronged policy approach:
  - Entitlement reform—start now but at a gradual pace to spread burden and avoid reversals.
  - Policies affecting demographics and labor markets: limited scope to boost fertility; migration from younger to older economies would help but is politically sensitive; policies to increase labor force participation of women and the elderly are promising.
  - Better tax systems and more efficient public expenditure to complement efforts where demographics cannot be fully offset.

*International Monetary Fund — Staff Discussion Note: THE FISCAL CONSEQUENCES OF SHRINKING POPULATIONS (Executive Summary pages).*

### LONG-TERM TRENDS: Aging, Shrinking Populations, and Age-Related Expenditure
- Baseline projections (2015–2100; unweighted averages for country groups; 37 more developed and 64 less developed countries):
  - More developed economies:
    - Pension spending: 9.6 (2015) → 10.7 (2050) → 11.5 (2100)
    - Health spending: 6.8 (2015) → 10.6 (2050) → 13.2 (2100)
    - Pension + health spending: 16.4 (2015) → 21.4 (2050) → 24.8 (2100)
    - Spending change 2015–2050: 5.0 (percentage points of GDP)
    - Spending change 2050–2100: 3.4 (percentage points of GDP)
    - PDV of spending change: 75 (2015–2050) and 204 (2050–2100) (percent of GDP)
  - Less developed economies:
    - Pension spending: 2.6 (2015) → 4.7 (2050) → 7.6 (2100)
    - Health spending: 2.9 (2015) → 5.2 (2050) → 8.4 (2100)
    - Pension + health spending: 5.5 (2015) → 10.0 (2050) → 16.0 (2100)
    - Spending change 2015–2050: 4.5 (percentage points of GDP)
    - Spending change 2050–2100: 6.1 (percentage points of GDP)
    - PDV of spending change: 70 (2015–2050) and 274 (2050–2100) (percent of GDP)
- Health spending drivers and PDV implications:
  - In more developed countries, health spending increases could “catapult public debt ratios” over 85 years.
  - PDV of increase in public health spending over 2015–50 is equivalent to 57 percent of today’s GDP; PDV of increase between 2050 and 2100 is 163 percent of GDP.
- Methodology highlights:
  - Pension projections to 2050 follow Clements, Eich, and Gupta (2014); after 2050 assume replacement ratios and coverage rates remain constant so pension spending increases broadly in line with old-age dependency ratio.
  - Health spending projections assume “excess cost growth” converges to the sample average by 2050 and declines to zero by 2100.
  - PDV estimated assuming interest rate-growth differential converges to 1 percent by 2025 from current levels of –0.8 for the more developed and –3.8 for the less developed (medians from World Economic Outlook).

### Demographic Uncertainty and Fiscal Sustainability
- Demographic projections are uncertain: fertility and mortality have in the past declined faster than UN medium projections, creating substantial fiscal risk.
- Demographics affect fiscal sustainability via:
  - Slower population growth → lower economic growth (Appendix 1).
  - Empirical link between economic growth changes and real interest rates (Appendix 2).
  - Small changes in the interest-growth differential have large effects on public debt dynamics.
- PDV assumption note: interest rate-growth differential convergence stated in places as from –0.7 percent for the more developed and –3.6 for the less developed; elsewhere noted as –0.8 and –3.8, converging to 1 percent by 2025.
- Accounting identities (Box 1):
  - Pension expenditure to GDP (PE/GDP) = benefit generosity × coverage × inverse labor force participation × old-age dependency ratio; under constant benefit and coverage ratios pension spending grows in line with the old-age dependency ratio.
  - Health expenditure to GDP (HE/GDP) = generosity for young × inverse labor force participation × function of per capita spending ratio for older versus younger (α) and old-age dependency ratio; with α = 3.2 (OECD average) health spending also grows with old-age dependency ratio but less rapidly than pensions.
- Sensitivity example:
  - A permanent decrease in growth of 0.5 percentage points per year starting in 2015 would increase pension spending by only 0.2 percentage points of GDP in 2030 (impact is temporary as pensions depend on past wages).

### Links between Demographics and Growth
- Fertility and participation:
  - Lower fertility could increase female labor force participation in more developed countries (Bloom and others 2007), but not necessarily in developing countries (Lim 2002).
- Productivity and aging:
  - Evidence suggests an older labor force is not necessarily more—or less—productive (Burtless 2013; Maestas, Mullen, and Powell 2014).
- Welfare effects:
  - Shrinking populations might reduce energy consumption and pollution—welfare gains not captured by growth effects.

### Fertility, Mortality, and Migration — Trends and Sensitivities
- Fertility:
  - More developed countries: 2.8 (1950) → 1.7 (2015); replacement ~2.1; projections: 1.8 (2050) and 1.9 (2100).
  - Less developed countries: >6 (1950) → 2.6 (2015); UN medium projects decline to about 2.0 by 2100.
  - UN low fertility scenario: fertility rates immediately drop by about 0.5 children per woman in both groups; under this scenario, age-related spending in 2100 would be higher by about 8 percentage points of GDP in the more developed economies and 4½ percentage points of GDP in the less developed economies.
  - Quantified pro-natal sensitivity example: an annual increase in fertility of about 0.7 percent starting in 2015 would reduce age-related spending by 0.7 percentage points of GDP in 2050 in the more developed countries and by near 4 percentage points of GDP by 2100.
- Mortality / longevity:
  - More developed: child mortality reached 0.1 percent in 2015; slowdown in mortality decline for ages 65+ (example: Japan 65+ mortality improvement 1.5 percent per year over 1950–2000 vs 0.2 percent per year over 2000–15).
  - Less developed: child mortality expected to decline to 0.1 by 2060.
  - Fiscal impact of faster longevity: if annual percentage decline in mortality is 1.5 times baseline (U.S. SSA “High Cost” analog), age-related spending in 2100 could increase by some 2 percentage points of GDP in both groups.
- Migration assumptions and history:
  - UN medium: net migration constant up to 2050, then declines to half of 2050 level by 2100.
  - Historical net migration change: increased from <0.5 to >2.5 per thousand in more developed countries (as share of population); net migration rates in 2015 range from about 0.5 per thousand in Japan to over 5 per thousand in Australia and Canada; in less developed economies net migration rates vary from –0.5 per thousand in Africa to –1 per thousand in Latin America.

### Migration, Labor Force Participation, and Fiscal Impacts
- Migration impact on age-related expenditure:
  - Continuation of migration trends into more developed countries would reduce age-related expenditure by 0.4 percentage point of GDP by 2050 and by 2 percentage points of GDP by 2100, without affecting less developed countries much.
  - Keeping old-age dependency ratio constant in more developed economies over 85 years would require an immediate eightfold increase in net migration (from 2.5 million to eventually over 21 million per year).
  - Migration provides a temporary workforce boost but eventual retirement of migrants also creates spending pressure; migration can provide time to phase reforms.
- Broader migration effects:
  - Migration can boost human capital, lifetime income for migrants, trade, investment, knowledge transfer; remittances stimulate growth and reduce poverty.
  - Concerns: increased public expenditure in receiving countries, erosion of human capital and tax base in sending countries, potential reduction in domestic job opportunities.
  - Evidence summary (Box 2): overall benefits tend to outweigh costs; overall effect of immigrants on current public budgets is likely to be small (OECD 2013).
- Political sensitivity:
  - OECD countries have about 115 million immigrants (OECD 2014); surveys show many respondents favor controlled or reduced migration (OECD 2010).

### Raising Labor Force Participation — Quantified Effects and Measures
- Female participation gaps:
  - For ages 25–49, female participation is below male by about 10 percentage points in Europe and North America, and by 25–30 percentage points in Asia, Latin America, and Africa.
  - Cutting the gap between men and women by half over 2015–50 would reduce age-related spending by about 1 percentage point of GDP in 2050 and by 1.5 percentage points by 2100 in both groups.
- Older worker participation:
  - Cutting in half the gap in participation between ages 55–64 and 25–64 would reduce age-related spending by almost 1 percentage point of GDP in both 2050 and 2100 in the more developed countries; effect about one-third of this in the less developed countries.
- Recommended measures:
  - Remove obstacles to women’s economic activity (property rights, professional access, financial inclusion, household headship permissions).
  - Review fiscal disincentives such as taxation of households that raises marginal rates for second earners.
  - Increase retirement ages linked to longevity gains, with protections for the poor.

### Reforms to Age-Related Spending Programs — Options and Impacts
- Pensions:
  - Raising retirement ages over 2015–2100 by an additional five years (about 7 months per decade) beyond legislated increases would reduce pension spending by about 2 percentage points of GDP by 2100 (relative to baseline) in both groups.
  - Starting reforms early allows gradual adjustment; delaying to 2050 would require increases of one year per decade to achieve same savings.
  - Other options: reduce pensions relative to wages, increase taxation of pensions for upper income groups, increase pension contributions (least preferred because of labor-demand effects).
- Health care:
  - Reforms to contain public health spending growth include promoting competition among insurers/providers, supporting primary and preventive care, improving provider payment systems, and using health information technology.
  - If health care cost growth per capita is kept in line with GDP per capita, by 2100 health spending would be reduced by 4½ percentage points of GDP in the more developed countries and 3 percentage points in the less developed.

### Aggregate Conclusions and Policy Implications
- Without further reforms, age-related outlays expected to increase over 2015–2100:
  - More developed economies: from 16½ to 25 percent of GDP.
  - Less developed economies: from 5½ to 16 percent of GDP.
- Potential consequences: unsustainable public debt increases, sharp declines in non-age-related spending, or large tax increases that could impede growth.
- Small changes in fertility, mortality, or migration can substantially affect age-related spending; fertility risks are particularly acute.
- No escape from entitlement reform:
  - More developed economies: priority to limit excessive health care cost growth and contain pension spending; increase retirement ages in line with longevity gains.
  - Less developed economies: strengthen public pension and health schemes while ensuring fiscal sustainability of expenditure increases.
  - Cross-cutting: tax and spending policies to encourage higher labor participation (women, young, old) and migration combined with other labor-market policies can ameliorate pressures but cannot fully replace entitlement reform.
- Timing and design:
  - Reforms should start now but be gradual; there is greater urgency to move on health care reforms.
  - Multipronged approaches will be needed; many countries must strengthen tax systems and improve efficiency of public spending outside pensions and health.

*INTERNATIONAL MONETARY FUND — Staff Discussion Note (Selected chapters and appendices from "_sdn1521").*

### Appendix 3 — United Nations Population Projections: Main Assumptions
- Fertility:
  - Three phases: high-fertility pretransition, fertility transition, low-fertility posttransition.
  - Probabilistic models reflect country-specific assumptions and empirical experience of low-fertility countries; for countries that completed transition a time series model is used with assumption ultimate fertility rates are not higher than 2.1.
- Mortality:
  - Life expectancy generally assumed to rise; asymptotic average rate of increase in life expectancy nonnegative; female life expectancy follows random walk with drift; male expectancies estimated from female expectancies and female–male gap distribution.
- Migration:
  - Difficult to project; simplifying assumptions: recent stable migration continues for years; refugees assumed to return within 5 to 10 years in general; temporary labor migrants modeled with return flows; after 2050 net migration gradually declines by 2100 to half of its 2050 level.
- Supplementary figures listed for fertility, crude mortality, age-group projections, migration rates, and regional/country series (titles and measures as specified in the source). 

*Source: IMF staff calculations and analysis drawing on UN (2015) population projections as presented in chapter 6 and appendices of "_sdn1521".*

### EXECUTIVE SUMMARY ________________________________________________________________________________ 4

### _sdn1521 - EXECUTIVE SUMMARY ________________________________________________________________________________ 4

### EXECUTIVE SUMMARY
- Declining fertility and increasing longevity will lead to a slower-growing, older world population; the share of the population older than age 65 could increase from 12 percent today to 38 percent by 2100.
- UN projections indicate population will peak sometime this century and decline thereafter; nearly 70 percent of the more developed countries and about 65 percent of the less developed countries would have shrinking populations by the end of the century.
- Two fiscal channels of pressure:
  - Higher spending on age-related programs (pensions and health).
    - Without further reforms, outlays would increase by 9 percentage points of GDP and 11 percentage points of GDP in more and less developed countries, respectively, between now and 2100.
  - Lower economic growth from declining populations, and—if not matched by lower interest rates—greater difficulty reducing public debt as a share of GDP.
- Demographic projections are highly uncertain; past fertility and mortality have sometimes declined faster than projected, implying large long-term fiscal risks.
- Policy approach recommended is multi-pronged:
  - Entitlement reform—start now but at a gradual pace to spread burden and avoid reversals.
  - Policies affecting demographics and labor markets:
    - Boosting fertility has limited scope via public policy.
    - Raising migration from younger, less developed economies to older, more developed economies would ameliorate spending pressures but is politically sensitive.
    - Policies to increase labor force participation of women and the elderly are promising.
  - Better tax systems and more efficient public expenditure to complement efforts where demographics cannot be fully offset.

### INTRODUCTION
- UN 2015 (2015 Revision of the UN World Population Prospects) projects the world population to peak around 2100 and begin to shrink thereafter.
- By 2100:
  - Nearly 70 percent of the more developed countries and about 65 percent of the less developed countries would have shrinking populations (Figure 1).
  - Global old-age dependency ratio (population ages 65 and older to population ages 15 to 64) would triple over the next 85 years; driven by rapid aging in the less developed economies, which account for 83 percent of the world population today.
  - In the more developed economies the old-age dependency ratio would double over this period.
- Current cross-country spending differences (2015 baseline):
  - More developed economies: public pensions 9½ percent of GDP; public health care 6.8 percent of GDP.
  - Less developed economies: public pensions 2½ percent of GDP; public health care 3 percent of GDP.
- Note on country groupings: “more developed economies” refers to Australia, Canada, European countries, Japan, New Zealand, and the United States (17 percent of world population in 2015); “less developed economies” refers to the rest (83 percent).

### LONG-TERM TRENDS: AGING, SHRINKING POPULATIONS, AND HIGHER AGE-RELATED EXPENDITURE
- Projected increases in age-related expenditures (baseline, 2015–2100; unweighted averages for country groups; projections cover 37 more developed and 64 less developed countries):
  - More developed economies:
    - Pension spending: 9.6 (2015) → 10.7 (2050) → 11.5 (2100)
    - Health spending: 6.8 (2015) → 10.6 (2050) → 13.2 (2100)
    - Pension + health spending: 16.4 (2015) → 21.4 (2050) → 24.8 (2100)
    - Spending change 2015–2050: 5.0 (percentage points of GDP)
    - Spending change 2050–2100: 3.4 (percentage points of GDP)
    - PDV of spending change: 75 (2015–2050) and 204 (2050–2100) (percent of GDP)
  - Less developed economies:
    - Pension spending: 2.6 (2015) → 4.7 (2050) → 7.6 (2100)
    - Health spending: 2.9 (2015) → 5.2 (2050) → 8.4 (2100)
    - Pension + health spending: 5.5 (2015) → 10.0 (2050) → 16.0 (2100)
    - Spending change 2015–2050: 4.5 (percentage points of GDP)
    - Spending change 2050–2100: 6.1 (percentage points of GDP)
    - PDV of spending change: 70 (2015–2050) and 274 (2050–2100) (percent of GDP)
- Health spending drivers and PDV implications:
  - In more developed countries, health spending increases could “catapult public debt ratios” over 85 years.
  - PDV of increase in public health spending over 2015–50 is equivalent to 57 percent of today’s GDP; PDV of increase between 2050 and 2100 is 163 percent of GDP.
- Methodological notes:
  - Pension projections to 2050 follow Clements, Eich, and Gupta (2014); after 2050 assume replacement ratios and coverage rates remain constant so pension spending increases broadly in line with old-age dependency ratio.
  - Health care spending projections driven by demographic and other factors; “excess cost growth” (growth of health care spending not explained by demographics) is assumed to converge to the sample average by 2050 and decline to zero by 2100.
  - PDV estimated assuming interest rate-growth differential converges to 1 percent by 2025 from current levels of –0.8 for the more developed and –3.8 for the less developed (medians from World Economic Outlook).

### THE IMPACT OF DEMOGRAPHIC UNCERTAINTY ON FISCAL SUSTAINABILITY
- Demographic projections are uncertain; fertility and mortality have in the past declined faster than UN medium projections, creating substantial fiscal risk.
- Demographics affect fiscal sustainability also via growth and interest rates:
  - Projected slowdown in population growth can translate into lower economic growth (Appendix 1).
  - Empirical evidence suggests changes in economic growth are typically matched by changes in real interest rates (Appendix 2).
  - Small changes in the interest-growth differential have large effects on public debt dynamics.
- For PDV calculations the note assumes the interest rate-growth differential converges from current levels (–0.7 percent for the more developed and –3.6 for the less developed in one place; elsewhere noted as –0.8 and –3.8) to 1 percent by 2025.
- Box 1: Accounting identities for pension and health spending:
  - Pension expenditure to GDP (PE/GDP) is the product of benefit generosity (average pension to GDP per worker), coverage (number of pensioners to population 65 and older), the inverse of the labor force participation rate (workers to population ages 15–64), and aging represented by the old-age dependency ratio (population 65 and older to population 15–64). Pension spending grows in line with the old-age dependency ratio under constant benefit and coverage ratios.
  - Health expenditure to GDP (HE/GDP) is the product of generosity of health package for young (average health spending per population 0–64 to GDP per capita), inverse of labor force participation rate of population 0–64, and a function of per capita health spending ratio for older versus younger (α) and the old-age dependency ratio. With α equal to 3.2 (OECD average), health spending to GDP also grows with the old-age dependency ratio, though at a smaller pace than pensions because both elderly and young receive health care benefits.
- Sensitivity example:
  - A permanent decrease in growth of 0.5 percentage points per year starting in 2015 would increase pension spending by only 0.2 percentage points of GDP in 2030 (impact is temporary as pensions depend on past wages).

### POLICY OPTIONS TO ADDRESS THE FISCAL CHALLENGE OF SHRINKING POPULATIONS
- General recommendation: a multi-pronged approach combining entitlement reform, demographic/labor-market policies, and broader public finance reforms.
- Entitlement reform:
  - Start now but implement gradually to spread burden across generations and avoid reversals.
- Policies that affect demographics and labor markets:
  - Measures to boost fertility could offset aging, but the ability of public policies to control birth rates appears limited.
  - Migration from younger, less developed to older, more developed economies would ameliorate spending pressures and provide time to phase in reforms, but is politically sensitive.
  - Policies to increase labor force participation of women and the elderly are promising.
- Broader public finance measures:
  - Better tax systems and more efficient public expenditure will be necessary in many countries because demographics alone cannot fully offset age-related spending increases.

### CONCLUSIONS
- Shrinking and aging populations pose a formidable long-term fiscal challenge through higher age-related spending and lower growth prospects.
- The magnitude and timing of the fiscal pressures depend critically on demographic outcomes, which are highly uncertain.
- Policymakers should prepare a gradual, multi-pronged policy response combining entitlement reforms, labor-market and demographic measures, and improvements in tax and spending efficiency to preserve fiscal sustainability over the long horizon.

*International Monetary Fund — Staff Discussion Note: THE FISCAL CONSEQUENCES OF SHRINKING POPULATIONS (Executive Summary pages).*

### 6.      The links between demographics and growth are numerous and subject to

### _sdn1521 - 6.      The links between demographics and growth are numerous and subject to

### Links between demographics and growth
- Lower fertility could increase the labor force participation of women in more developed countries (Bloom and others 2007), but not necessarily in developing countries (Lim 2002).
- Population aging could have an impact on labor productivity, although evidence suggests that an older labor force is not necessarily more—or less—productive (Burtless 2013; Maestas, Mullen, and Powell 2014).
- Shrinking populations might have positive consequences for welfare not captured in growth effects (for example, a declining global population will, other things being equal, reduce energy consumption and pollution).

### Demographic projection assumptions and uncertainty
- Fiscal projections for age-related spending to GDP largely depend on the expected evolution of old-age dependency ratios.
- The UN "medium variant" scenario (baseline used here) relies on probabilistic models for fertility and mortality at a country level; for migration the UN assumes net migration remains constant up to 2050, and then declines gradually to half of this level by 2100.
- Demographic projections are surrounded by substantial uncertainty: future realizations of fertility, mortality, and migration might differ substantially from predicted levels.
- Alternative views: Lutz and others (2001, 2008, 2014) suggest the peak of world population might be as early as 2070 and that by the end of the century population might be significantly lower than the UN projects, reflecting steeper fertility declines—particularly in Africa.
- Past UN medium-variant projections have proved biased upward, mainly because fertility rates declined faster than expected (Gros and others 2013).

### Fertility: recent trends and projections
- More developed countries:
  - Fertility declined from 2.8 children per woman in 1950 to 1.7 in 2015.
  - Replacement rate (assuming no immigration) is about 2.1 children per woman.
  - Projections assume a modest increase to 1.8 by 2050 and 1.9 by 2100.
  - Example: 29 out of 40 European economies experienced a slight increase in fertility rates over 2005–15.
  - Note: Many demographers are less bullish; expert mean fertility estimates for 2050 were below the UN projection in 27 out of 31 low-fertility countries (Basten, S., T. Sobotka, and K. Zeman 2014).
- Less developed countries:
  - Fertility declined from more than six children per woman in 1950 to 2.6 in 2015.
  - UN medium projection assumes a continuous decline to about 2.0 children per woman by 2100.
- Policy-scenario sensitivities:
  - UN low fertility scenario assumes fertility rates immediately drop by about 0.5 children per woman in the more and less developed countries.
  - Under the UN low fertility scenario, age-related spending in 2100 would be higher by about 8 percentage points of GDP in the more developed economies and 4½ percentage points of GDP in the less developed economies.

### Mortality and longevity risk
- More developed economies:
  - Child mortality reached 0.1 percent in 2015.
  - Projections imply a slowdown in the decline in mortality for ages 65 and older; example: Japan’s mortality rate for 65+ improved by 1.5 percent per year over 1950–2000 but only by 0.2 percent per year over 2000–15.
- Less developed economies:
  - Child mortality expected to decline to 0.1 by 2060 (the level reached in more developed countries in 1980).
  - Mortality rates for older ages decline but remain above the more developed-economies projections.
- Fiscal impact of longevity improvements:
  - Assuming the annual percentage decline in mortality is 1.5 times as large as the baseline (similar to the U.S. Social Security Administration “High Cost” scenario), age-related spending in 2100 could increase by some 2 percentage points of GDP in both the more and less developed economies.

### Migration
- UN medium projection assumption:
  - Net international migration flows from less developed countries to more developed countries remain constant over 2015–2050, followed by a steady decline to half of the 2050 level by 2100.
- Historical context and variation:
  - Migration from less to more developed countries (as a share of the population in more developed countries) increased from less than 0.5 to more than 2.5 per thousand (or from 0 to about –0.5 per thousand population in the less developed).
  - Net migration rates in 2015 in more developed economies range from about 0.5 per thousand in Japan to over 5 per thousand in Australia and Canada.
  - In less developed economies, migration rates vary from –0.5 per thousand in Africa to –1 per thousand in Latin America.

### Policy options to address fiscal challenges from shrinking populations
- Two broad categories of policy response:
  1. Policies that attempt to change underlying demographics:
     - Introduce incentives to increase fertility.
     - Allow greater net migration.
     - Raise labor force participation.
  2. Policies that contain growth in age-related spending:
     - Reforms affecting health care and pension systems to contain cost growth.
- Evidence on boosting fertility:
  - Pro-natalist policies typically aim to offset direct costs (baby bonuses, family allowances, tax incentives) and opportunity costs (parental leave, subsidized child care, flexible work schedules).
  - Effects of pronatalist policies appear modest: they may affect timing of births and labor-supply decisions of mothers but tend to have limited impact on long-term fertility levels (Gauthier and Hatzius 1997; Ronsen 2004; d’Addio and d’Ercole 2005; Piketty 2005; Thevenon and Gauthier 2011; Kluve and Schmitz 2014; Brainerd 2014).
  - Country examples: Spain’s temporary increases linked partly to immigrants; Germany’s 2007 parental allowance did not noticeably raise fertility (remaining about 1.35); China’s relaxation of the one-child policy may have slight but uncertain effects (Basten and Jiang 2015).
  - Quantified effect example: Assuming an annual increase in fertility of about 0.7 percent starting in 2015 (the average increase observed in Europe in the past two decades) would reduce age-related spending by 0.7 percentage points of GDP in 2050 in the more developed countries and by near 4 percentage points of GDP by 2100.
  - Conclusion: A “birth rate” solution is unlikely to work for most countries; policies should focus on encouraging labor force participation (for example, through tax credits or access to child care) and avoid untargeted and costly child allowances.
- Other policy levers discussed (qualitative summary):
  - Allowing greater migration can help reduce fiscal pressures, subject to political and social constraints.
  - Increasing labor force participation of women and of the elderly can help moderate age-related spending pressures.
  - Increasing retirement ages (example simulation: increase retirement age by five years over 2015–2100) and lowering excess cost growth in health care are presented as options to contain fiscal costs from aging.

*Italic: Source: IMF staff calculations and analysis drawing on UN (2015) population projections as presented in chapter 6 of "_sdn1521".*

### 21.      Immigration can have an impact on long-term expenditure trends. Assuming a

### _sdn1521 - 21.      Immigration can have an impact on long-term expenditure trends. Assuming a

### Migration and long-term age-related expenditure
- Continuation of trends in migration into the more developed countries would reduce age-related expenditure by 0.4 percentage point of GDP by 2050 and by 2 percentage points of GDP by 2100, without affecting age-related expenditure by much in the less developed countries (Table 3).
- Under this scenario, by the end of the century, average migration rates would still be below the current levels of net migration into Australia or Canada.
- Keeping the old-age dependency ratio constant over the next 85 years in the more developed economies would require an immediate eightfold increase in net migration (from 2.5 million to eventually over 21 million per year net migrants from the less developed to the more developed countries).
- Such migration levels would eventually deplete the working-age population in the less developed economies.
- Migration provides a temporary boost to the workforce and can increase growth and fiscal revenue, but eventually these new workers will also retire and exert pressure on spending.
- Migration can provide more time for countries to implement needed age-related reforms.

### Broader impacts of migration
- Migration can boost human capital and lifetime income for migrants, and facilitate trade, investment, and knowledge transfers across countries.
- Remittances from migrants stimulate long-term growth, reduce poverty, and promote financial deepening in countries receiving remittances (Gupta, Pattillo, and Wagh 2009).
- Concerns: greater migration could increase public expenditure in migrant-receiving countries (particularly those with extensive social safety nets), erode human capital and tax bases in migrant-exiting countries (especially if migrants are high skilled), and reduce job opportunities for domestic workers.
- The literature suggests that, on balance, the benefits from migration outweigh its potential costs (Gibson and McKenzie 2012), and that the overall effect of immigrants on current public budgets tends to be very small (Box 2).

### Political sensitivity
- Migration is an important factor in shaping social, political, and economic fabrics; in the OECD countries there are about 115 million immigrants (OECD 2014).
- Survey data suggest a large proportion of respondents remain in favor of controlled or reduced migration (OECD 2010).

### Box 2 — The Economic Impact of Migration (summary of key points)
- Migration affects public pension and health care finances depending on migrant characteristics, tax progressivity, and social safety net structure.
- Young migrants can augment the labor force and the tax base for pay-as-you-go systems; the impact depends on effects on domestic wages, migrant skills/productivity, and tax collection.
- Immigrants likely increase demand for public services (for example, health care) and will eventually be eligible for pensions.
- Recent theoretical and empirical evidence:
  - Immigrants can complement native workers rather than being perfect substitutes (Ottaviano and Peri 2012).
  - Firms facing larger labor availability may invest more, expanding existing companies and creating new ones, increasing overall economic size.
  - Immigrants are often paid less compared to domestic workers of similar characteristics and skills, allowing companies to save costs and increase productivity (Hanson 2012).
  - Example: in the United States about a quarter of the technology company startups over 2008–12 included one foreign-born founder (Wadhwa, Saxenian, and Siciliano 2012).
- Immigrants often have less favorable labor market outcomes and may not spend their whole lives in the host country, affecting taxes paid and benefits received.
- Evidence suggests the overall effect of immigrants on current public budgets is likely to be small (OECD 2013).

### Raising labor force participation
- Increasing labor force participation rates—especially for women and older workers—can mitigate aging effects, assuming constant productivity per worker.
- For ages 25–49, female labor force participation rates are below those of men by about 10 percentage points in Europe and North America, and by 25–30 percentage points in Asia, Latin America, and Africa.
- Cutting the gap between men and women by half over 2015–50 would reduce age-related spending by about 1 percentage point of GDP in 2050 and by 1.5 percentage points by 2100 in both the more and less developed economies.
- Cutting in half the gap in participation between individuals 55–64 and 25–64 would reduce age-related spending by almost 1 percentage point of GDP in both 2050 and 2100 in the more developed countries; the effect is about a third of this in the less developed countries.
- Recommended measures include removing obstacles to women’s economic activity (property rights, ability to pursue professions, open bank accounts, sign contracts, head households), and reviewing fiscal disincentives such as taxation of households that can raise marginal rates for second earners.

### Reforms to age-related spending programs
- Pensions:
  - Raising retirement ages over 2015–2100 by an additional five years (about 7 months per decade) beyond what is already legislated would reduce pension spending by about 2 percentage points of GDP by 2100 (relative to the baseline) in both the more and less developed countries.
  - Linking retirement-age increases to longevity gains is suggested, with adequate provisions for the poor.
  - Starting reforms early allows more gradual adjustment; if adjustments start in 2050 instead of 2015, retirement age increases would have to be one year per decade to achieve the same savings.
  - Other options: reducing pensions relative to wages, increasing taxation of pensions for upper income groups, increasing pension contributions (the latter is least preferred because of likely impact on labor demand).
- Health care:
  - Health care reform can contain growth of public health spending; policies should ensure new technologies reduce rather than raise health care costs without harming outcomes (Clements, Coady, and Gupta 2012).
  - Promoting competition among insurers and providers, supporting primary and preventive care, improving provider payment systems, and using health information technology to collect, store, and share patient data can reduce costs while protecting outcomes.
  - If policies keep the growth of health care costs per capita in line with GDP per capita, then by 2100 health spending would be reduced by 4½ percentage points of GDP in the more developed countries and 3 percentage points in the less developed.

### Conclusions and policy implications
- Without further reforms, age-related outlays are expected to increase over 2015–2100 from 16½ to 25 percent of GDP in the more developed economies, and from 5½ to 16 percent of GDP in the less developed economies.
- Such spending increases could lead to unsustainable increases in public debt, sharp declines in other spending, or large tax increases that could stymie economic growth.
- Projections are surrounded by substantial uncertainty; small changes in fertility, mortality, or migration can substantially affect age-related spending. Risks are especially acute with respect to fertility.
- No escape from reforming entitlements:
  - In more developed economies: priority to limit excessive growth of health care costs and contain pension spending; increasing retirement ages in line with longevity gains is promising.
  - In less developed economies: strengthen public pension and health care schemes while ensuring expenditure increases are fiscally sustainable.
  - Tax and spending policies encouraging higher labor participation rates for women and for young and old workers will also be necessary.
- Migration and labor market policies can ameliorate the impact of aging in the more developed economies but fully addressing aging would require unrealistically large migration flows; increases in migration, combined with other labor market policies, can reduce age-related spending and provide more time for entitlement reform.
- Given the magnitude of the fiscal challenge, reforms should start now but be gradual; there is greater urgency to move on health care reforms. Multipronged approaches will be needed, and many countries will need to strengthen tax systems and improve efficiency of public spending programs outside of pensions and health.

*INTERNATIONAL MONETARY FUND*

### Appendix 3. United Nation Population Projections—Main

### Appendix 3. United Nation Population Projections—Main

### Assumptions — Fertility
- The UN fertility projections are based on a general consensus that the evolution of fertility includes three broad phases: a high-fertility pretransition phase, a fertility transition phase, and a low-fertility posttransition phase.
- Future long-term fertility levels are projected using probabilistic models, reflecting country-specific assumptions as well as the empirical experience of low-fertility countries that had experienced some increase in fertility in at least two consecutive periods.
- For countries with fertility rates above replacement, projections combine a systematic decline with a random distortion term.
- The pace of the decline is a function of its current level, with the distribution based on historical trends within the country and in other countries that have experienced a fertility decline.
- For countries that have completed the demographic transition, a time series model is used, using the distribution from all countries with low fertility rates, including those with extended experiences of low fertility and those that have increased slightly over the past two decades—assuming ultimate fertility rates are not higher than 2.1.
- Footnote: “In consequence, fertility projections are not the outcome of the optimizing behavior of individuals (Lucas 2001) or directly linked to economic prosperity (as in Malthusian or Ricardian models), but are exogenous determined by these probabilistic models.”

### Assumptions — Mortality
- Life expectancy is generally assumed to rise over the projection period for most countries.
- By assuming that the asymptotic average rate of increase in life expectancy is nonnegative, life expectancy is assumed to continually increase (on average), and no limit is imposed on life expectancy in the foreseeable future.
- Results for life expectancy are based on probabilistic models based on country-specific information as well as on past empirical trends.
- The projections assume random walk with a drift for female life expectancy.
- Male expectancies are estimated based on the correlation with female life expectancy, and a distribution of the female–male gap that depends on the level of female life expectancy.

### Assumptions — Migration
- Formulating assumptions about future international migration is very difficult because international migration has shown drastic changes in absolute numbers and changes in the direction of flows.
- Simplifying assumptions introduced:
  - Recent levels of international migration, if stable, would continue for a number of years; governments’ views and estimates of undocumented and irregular migration flows were also considered.
  - Regarding refugees, it was assumed in general that refugees return to their countries of origin within one or two projection periods (that is, 5 to 10 years).
  - If a country was known to attract temporary labor migrants, an effort was made to model the return flow of those labor migrants, accounting for aging of the migrants involved.
  - After 2050, it is assumed that net migration would gradually decline by 2100 to half of its 2050 level.

### Supplementary Figures (titles and measures)
- Fertility Rate, 1955–2100 (Children per woman).
- Crude Mortality Rate, 1950–2100 (In percent of population).
- Projections by age groups shown for: Age 0-14, Age 15-64, Age 65 and older.
- Migration Rate, 1950–2100 (Migrants per 1,000 population).
- Regional and country series illustrated include: More Developed Countries, Western Europe, United States of America, Less Developed Countries, Africa, Latin America And The Caribbean, Asia, Japan, Europe, Australia, United States.

*Source: Appendix 3 and Appendix 4 (Figures) from the provided IMF content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2015/_sdn1521.pdf_