As Western populations age, fewer workers and rising costs will strain public finances, credit rating agency Moody’s has warned.
Europe is at the end of a period of rapid demographic change. According to the European Commission, the European Union’s population is expected to peak as early as 2029, “after which a sustained long-term decline will begin.”
The U.S. Census Bureau doesn’t expect the U.S. population to peak until 2080 under its primary projections or until 2043 under its low-immigration scenario. Even excluding the effects of immigration, population decline has already begun.
But Moody’s says fiscal pressures from an aging population emerge long before the population actually begins to decline.
Currently, in G7 countries, there are approximately 3 people of working age per capita aged 65 and over. That ratio is expected to fall to about two people by 2050, Moody’s said, putting further pressure on growth and public finances, including the health system.
Olivier Chemra, vice president of credit strategy and standards at Moody’s, told CNBC’s “Squawk Box Europe” on Friday that aging is impacting the economy through slower economic growth, increased pressure on public finances from pension and long-term care costs, changes in consumer demand, and changes in real interest rates and sovereign yields.
In a report released last week, Moody’s predicted that the world’s aging population will have fundamental implications for the global economy and lead to difficult policy decisions.
Population growth has long been a tailwind for growth and creditworthiness, but falling birth rates and changing age structures at unprecedented speed are now changing that, Moody’s writes.
“A decline in the number of workers will limit productive capacity, while fewer households and consumers will weaken demand. As a result, countries will need to rely more on productivity to sustain growth,” the report said.
Impact of AI
AI and productivity gains can only partially offset the long-term challenge of an aging workforce, Chemla said.
“This is a partial mitigation measure, because it will definitely replace and strengthen the supply side of the economy in factories and services. But at the same time, at least not yet, robots will not consume, so there will still be that gap on the demand side, which will slow growth,” he added.
Populations are aging rapidly not only in Europe and America, but also in emerging countries. The proportion of China’s population aged 65 and over has doubled from 7% to 14% over the past 20 years, with Brazil, Thailand and Turkiye following a similar trajectory.
These countries will face the cost of aging at much lower income levels than the developed countries that began aging before them, the report says, noting that similar changes have taken decades in Europe.
