Shrinking Populations, Rising Fiscal Challenges
IMF Blog, October 27, 2015
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Bibliographic details
- Authors: Benedict Clements, Kamil Dybczak, Mauricio Soto
- Published: October 27, 2015
Overview and projections
- Publication date: October 27, 2015; By Benedict Clements, Kamil Dybczak, and Mauricio Soto.
- Population trajectories:
- By the end of this century, populations will be shrinking in about two-thirds of the world’s countries: nearly 70 percent of more-developed countries and about 65 percent of less-developed ones.
- The share of the world population older than age 65 is expected to increase from 12 percent today to 38 percent by 2100 (old-age dependency ratio: the 65-and-older population as a percentage of the population aged 15 to 64).
Fiscal impacts and projections under unchanged policies
- Expected increases in age-related spending (pensions and health) with current policies unchanged:
- In more-developed countries, spending will reach 25 percent of GDP by the end of the century.
- In less-developed countries, spending will reach 16 percent of GDP by the end of the century.
- Potential fiscal consequences:
- Unsustainable public debt, sharp cuts in other spending, or large tax increases that stifle economic growth.
Risks to projections
- Demographic projection uncertainty:
- If fertility and mortality turn out to be lower than forecast, fiscal impacts will be larger.
- Example sensitivities:
- Lower fertility on its own could raise age-related spending by another 8 percentage points of GDP in more-developed countries by the end of the century.
- Lower fertility could raise age-related spending by another 4½ percentage points of GDP in less-developed countries by the end of the century.
- Additional longevity increases would add further fiscal impact on top of these figures.
Policy recommendations and potential fiscal effects
- Entitlement reform
- Start now, but implement at a gradual pace to spread burdens across generations and reduce risk of reversals.
- Contain growth of health care spending
- If growth in health care costs per capita were kept in line with growth in GDP per capita:
- This could lower public health care spending by 4½ percentage points of GDP by 2100 in more-developed countries.
- This could lower public health care spending by 3 percentage points of GDP by 2100 in less-developed countries.
- Possible measures: increase competition among insurers and service providers; improve provider payment systems; emphasize primary and preventive health; make more effective use of health information technology.
- Increase retirement ages to match longevity gains
- Increasing the retirement age by an extra five years has the potential to yield savings on pension spending of about 2 percentage points of GDP in both more- and less-developed countries.
- Accompany increases with adequate provisions for the poor, who have shorter life expectancy than the average population.
- Policies affecting demographics and labor markets
- Raising migration from younger, less-developed economies to older, more-developed economies can relieve spending pressures until migrants age and retire; not a substitute for fundamental entitlement reforms.
- Boosting fertility has limited responsiveness to public policy.
- Raise labor force participation—especially for women and older workers—by addressing:
- Gender differences in property rights, inheritance claims, and property titling.
- Barriers to women pursuing professions, obtaining jobs, or opening bank accounts.
- Legal rights for women to initiate legal proceedings, sign contracts, and head households.
- Fiscal disincentives such as taxation of households that raise marginal rates for second earners.
- Improve tax systems and public expenditure efficiency
- Tax-side measures: widen VAT bases; strengthen taxation of multinational corporations; greater use of energy taxation; exploit recurrent property taxation; strengthen tax compliance.
- Spending-side measures: reduce energy subsidies; improve public investment management; rationalize public sector wage bills, including in education.
Summary conclusion
- The fiscal challenge from shrinking and aging populations is stark and requires bold, multi-pronged reforms.
- Undertaking reforms now allows more gradual, politically palatable adjustment and reduces the risk of unsustainable fiscal outcomes.
Source: Shrinking Populations, Rising Fiscal Challenges (IMF blog, October 27, 2015).
Content in this bundle
- 人口缩减，财政挑战增加; iMFdirect博客; 2015 年10 月27 日
- 減少する人口、増大する財政面での課題: ベネディクト・クレメンツ、 カミール・ドゥブチャック、モリシオ・ソト; iMFdirect ブログ2015年10月27日掲載
- Fiscal Monitor: Taxing Times; October 2013
- Fiscal Monitor: Public Expenditure Reform—Making Difficult Choices; April 2014
- Country Report
- Staff Discussion Note
- Staff Discussion Note