The rapid aging of the populations of all industrial countries over the next 40 years will be an economic and social transformation of vastly greater magnitude than the 1970's oil shock or the 1980's recession.

Two big changes are taking place : Old people are living longer and young people are having smaller families. The change in the age structure of the population is happening at different speeds in different countries. In Britain and Germany, for instance, the proportion of people aged 65 and over, relative to those aged between 15 and 64, is already higher than it will be in Japan at the turn of the century or in the United States in 2010. But unless birth rates rise dramatically, this "old-age dependency ratio" will roughly double in Europe by 2040.

Two main issues are at stake. What will aging do to economic growth ? And how will it change the way in which the fruits of that growth are shared ?

The first question is harder to answer than the second. Economic growth, in a slowly expanding population, is likely to come mainly through technical change which allows each worker to make efficient use of a greater stock of capital. But some economists think that technological progress is helped by rapid population growth (as proof they point to the simultaneous explosion of Victorian birth-rates and inventiveness). Others argue that an aging society has an aging workforce and that older workers may be less mobile and slower to learn new skills.

An aging economy needs growth even more than a youthful one, because as the old-age dependency ratio increases, each worker has to share the value of his output with more elderly people. There are only three ways out of this situation : Workers may give up a larger share of their output, or pensioners may accept a decline in their living standards relative to workers, or more old people may stay in the job market for longer, thus simultaneously increasing the number of workers and cutting the number of jobless old people who need to be supported.

The Economist, June 1993