What is... a dependency ratio
What is...
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We know people in many countries are living longer.
And while this is good news, it carries wide implications for governments and individuals due to changes in the “dependency ratio” of countries.

The dependency ratio compares the number of available workers with the number of those considered to be dependent on the state. The “workers” are people aged 15 to 64 years, with school-aged under-15s and retirement-aged 65s and older classified as “dependent”.

A mixed blessing
Population changes present challenges for governments and individuals. An increase in the child dependency ratio – those aged under-15 – may require increased spending on schooling and maternity-based health care. But children grow and eventually join the workforce and could ultimately tip the balance back. Rises in the aged dependency ratio – an increase in the proportion of citizens aged 65 and above – present special challenges to societies. More financial support for pensions and healthcare may be needed from “the workers”, or reforms may be implemented to cope with demand.

Where the older people are
Data collected by the World Bank show that richer countries have the highest aged dependency ratios. In Japan, there were almost 34 older people for each 100 of working age in 2009. Japan’s old age dependency ratio rose from 26 in 2001 to 34 in 2009, the fastest rise of any country. 
Europe is home to the rest of the top 25 countries with the highest dependency ratios. The United Arab Emirates and Qatar have the lowest ratio of 192 countries in the World Bank figures with a ratio of just one older person per 100 working age people. Ratios in the influential Group of 20 – or G-20 – countries range from 34 in Japan to five in Saudi Arabia. 
The problem of rapidly rising dependency ratios is spreading south of the Equator. The World Bank figures show the 10 countries with the fastest rising ratios between 2001 to 2009 included South Korea, North Korea, Singapore and Puerto Rico. Some demographers expect China to experience a rapid increase in the dependency ratio over the next few decades, as the “one child” policy over past decades will likely lead to an ageing of the population.

Hatches, matches, dispatches
The problem of funding retirement and healthcare for aging populations is getting more urgent. It was once unusual to live to 100 but centenarians are likely to become more common in the near future. It has been estimated that more than half of babies born in the United States, Japan, Western Europe and other developed nations since 2000 are likely to live to age 100. Falling birth rates also contribute to rising dependency ratios by reducing the number of people entering the workforce in the future. Separate data from the World Bank show that 72 countries have a total fertility rate below the population replacement rate of 2.1 children per woman. Without immigration, having fewer children is likely to increase age dependency ratios in those countries.

Grey-haired workers
Governments in some countries have responded to the increased pressure on public finances from an ageing population by raising the state pension age. The United Kingdom, for example, plans to raise the official retirement age to 68 from 65 for men by 2044, and from 60 to 66 for women. The eZonomics story What is … causing later retirement? referred to Spain’s announcement to hike its official retirement age to 67. The ageing of the population – and the rising dependency ratios – may mean people work until an older age. 
Consultancy Hays says in report that developed countries need to encourage people to continue working after their official retirement age. 
In his book The Age of Ageing, economist George Magnus says making the transition from work to retirement more flexible will mean older workers pay taxes for more years and draw their pensions later, easing the pressure on the public finances.

New workers please
In some countries population growth is driven in part by immigration. The Hays report says there will be demand for health workers, which could be filled by skilled newcomers to a country.

Future planning
The problem of rising dependency ratios present very real challenges to the current generation of workers. If state retirement ages are rising, it is arguably more important to put aside money in private retirement savings. ING’s Be Good at Money video tutorial on retirement tells why saving for retirement is important and why it’s best to start putting money away for it as soon as practicable.

 

By Phil Thornton
Clarity Economics’ lead consultant
What is... is an occasional series that explains important ideas and terms.