Demographic Dividend Window of Opportunity

The economic
implications of changing
age structures
Ronald Lee
University of California at
Berkeley
Based on research supported by
National Institute of Aging
The first demographic dividend
The transition to low fertility leads to

a period during which the population
of working age increases faster than
the consuming population.
This first demographic dividend
boosts per capita income.
The first dividend is transitory
The first demographic dividend is

transitory because, eventually, the
population of working age ceases to
increase.
When this happens, income per
consumer drops, a cause of concern.
The second demographic dividend
Lower mortality produces longer

lives.
As people live longer, they need
to accumulate more wealth to
defray consumption in old age
The second dividend is permanent
The higher the proportion of

older persons, the higher wealth
per capita.
With more wealth per worker,
productivity and asset income
increase,leading to a long-lasting
second demographic dividend.
Conditions leading to the second

dividend
To realize the second dividend, wealth

must be accumulated as savings or
assets.
To the extent that older persons
depend on family transfers or public
pensions, the second dividend is
reduced.
Crucially
the economic effects of
population aging depend on
institutions and policies.
THE CASE OF INDIA
Indian life expectancy began to rise around

1900, here simulated to go from 24 to 80 years.
Life expectancy in years
Earlier UN
projections
Actual data (*)

Actual data (*)
Simulations
based on
smooth
mathematical
trajectories for
fertility and
mortality
Indian fertility began to fall around 1960,

here simulated to go from 6 to 2.1 births .
Children per woman
Changes in the child dependency ratio
Then declining
fertility reduces
the ratio.
Increasing
survival of
children initially
raises the ratio
Child dependency
ratio (<15/15-64)
Once fertility begins

to decline, the
child dependency
ratio falls.
Changes in the old-age dependency ratio
Onset of serious
population aging is late
in the transition
Old-age
dependency
ratio (65+/15-64)
Serious
population aging
begins more than
a century after
the transition
starts.
The old-age
dependency ratio
rises rapidly, by a
factor of five or
six.
Variation in the total dependency ratio

Rising
Rising
dependency as
dependency
mortality
as
mortality
falls
falls
Dependency ends where it

began. Transitory effect.
The first dividend:

Dependency falls
Population aging
Variation in the total dependency ratio

Rising
dependency
as mortality
falls
At start: Many children
and few elderly.
At end: Many elderly and
few children.
This generates the
second dividend.
The first dividend:

dependency falls
Population aging
There is great variation in projected

old age dependency ratios for 2050
How Dependency Ratios Change Over A Classic Demographic Transition:

Actual and Projected for India and Simulated, 1900-2100
Japan
Southern Europe
Europe
China
USA
Least
developed
countries
Ratio in Southern
Europe projected
to be 6 times as
high as in the
least developed
countries.
Differences are
due to position in
transition, baby
booms and busts,
and fertility
below
replacement.
LABOUR INCOME AND

CONSUMPTION
How labour income and

consumption vary by age
To understand the economic

implications of age structures, we
need to know how labour income and
consumption vary with age.
The National Transfer Accounts
project (NTA) is estimating these for
many countries.
Source: Sang-Hyop Lee, re

port on NTA labor income








Consumption by age
The National Transfer Accounts

include private household
consumption and also the cost of
publicly provided education, health
care, and other items.
A typical developing country:

Thailand, 1998
Some developed countries have high

consumption in old age (USA, 2003)
60000
Dollars (US, 2000)
50000
Consumption
40000
30000
20000
10000
Labor Income
0
0
20
40
50000
Source:
40000National Transfer Account data.
60
80
SUPPORT RATIOS AND

THE SECOND DIVIDEND
Economic consequences of age

distribution: Support ratios
The relation between workers and

consumers in a population is
summarized by the support ratio
The support ratio is the population
times labour income divided by the
population by consumption at each
age
The support ratio
A high support ratio is favourable.

The transition to low fertility
produced a increasing support ratio
during the period of the first
demographic dividend.
Niger first dividend:

2014-2090, 76 years,
increase of 52%
.55% per year.
2007
First dividend for

China and South
Korea is about
finished.
China: 1971-2013, 42
years, increase of
35% or .7% per year,
India is in middle of
first dividend phase.
2007
Brazil is near the

end.
For
For Japan,
Japan, Spain,
Spain, Italy,
Italy
and
and Germany,
Germany, the
the
support
support ratios
ratios drop
drop
substantially
substantially by
by2050.
2050.
For
For US, less so.
so.
For MDCs other than US, an annual decline of .6 to .8%.

Compare to expected productivity growth of 1 to 2% per year.
Population ageing, savings and

capital
The first demographic dividend is

transitory.
Given the right policies, changes in
age structure can produce a second
demographic dividend which is
permanent.
The second demographic

dividend
Typically, adults accumulate assets over

their lifetimes.
Hence, the elderly hold more assets than
others.
Population aging raises the population share
of the elderly and therefore raises the
average per capita amount of wealth and
asset income.
More capital per worker also raises labour
productivity producing the second dividend.
The second dividend is

reinforced by demographic
change
Longer life requires increased saving

for retirement.
Lower fertility may mean higher
saving by parents with fewer
children.
For these reasons, older persons
may accumulate even more wealth.
The savings rate may decrease

as the population ages
Reaping a second dividend does not

require an increasing savings rate.
Actually, aggregate saving may well fall.
The second dividend can nevertheless
occur, because with slower labour force
growth, even lower saving can raise
capital per worker.
However, the second dividend

depends on institutions
If older persons are supported by

their adult children, they will
probably save less.
If older persons are supported by
unfunded public pensions, they are
also likely to save less.
In both cases, the second dividend is
reduced.
How old age consumption is financed in four

countries
Island of
Taiwan 1998
Source: National Transfer Accounts.
Major differences across the four

countries
Public transfers account for 65% of elder

consumption in Japan, but only 3% in
Thailand.
Family transfers account for 40% in Taiwan,
Province of China but only 4% in Japan.
Assets account for 40% in Thailand and the
US, but only 15% in Japan.
RECAPITULATION
The transition leads to a first

dividend
Low fertility, longer life and slower

population growth or decline are the
destiny of all countries.
The transition to low fertility
produces increasing support ratios
for a period and a first dividend thus
accrues.
The first dividend is transitory
As population ageing continues, the

support ratios eventually decline
With more older persons, institutions
and programmes focused on the
elderly will come under severe
stress.
The second dividend will help
Yet, even as the population ages,

the second demographic
dividend increases capital per
worker, boosting productivity
and asset income.
The second dividend is not

automatic
BUT, realization of the second

dividend depends on the
institutional context of each country
and the extent to which it favours
peoples reliance on savings and the
accumulation of assets for old age
support.
Transfers compete with the

second dividend
Because inter-generational transfers

compete with savings or asset
accumulation as sources of support for old
age, less of them is better if the second
dividend is to be maximized.
BUT, transfers may be necessary,
especially to provide a safety net for the
poor. Policy-makers should weigh carefully
their costs and benefits.
But transfers may be necessary
Transfers may be necessary,

especially to provide a safety net for
the poor, but policy-makers should
weigh carefully their costs and
benefits.
There is no need for alarm, but

there is need for action
Population aging is not a

cause for alarm, but it will
require adjustment of
institutions and programmes.
Policy-makers must reassess

their transfer systems
At early stages of the aging

process, Governments have the
option of encouraging asset
accumulation rather than
transfers for old age support and
thus harness the power of
population aging to increase
wealth.
Delay is not an option
Delays can only lead to the

increase of debt in transfer
programmes and limited
flexibility to change, as in
developed countries today
Population ageing
presents many
opportunities if we
address the challenges it
posses.

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The economic

The first demographic dividend

The transition to low fertility leads to

The first dividend is transitory

The first demographic dividend is

The second demographic dividend

Lower mortality produces longer

The second dividend is permanent

The higher the proportion of

Conditions leading to the second

To realize the second dividend, wealth

THE CASE OF INDIA

Indian life expectancy began to rise around

Actual data (*)

Indian fertility began to fall around 1960,

Changes in the child dependency ratio

Once fertility begins

Changes in the old-age dependency ratio

Variation in the total dependency ratio

Dependency ends where it

The first dividend:

Variation in the total dependency ratio

The first dividend:

There is great variation in projected

How Dependency Ratios Change Over A Classic Demographic Transition:

LABOUR INCOME AND

How labour income and

To understand the economic

Source: Sang-Hyop Lee, re

Source: Sang-Hyop Lee, re

Source: Sang-Hyop Lee, re

Source: Sang-Hyop Lee, re

Source: Sang-Hyop Lee, re

Source: Sang-Hyop Lee, re

Source: Sang-Hyop Lee, re

Source: Sang-Hyop Lee, re

Source: Sang-Hyop Lee, re

The National Transfer Accounts

A typical developing country:

Some developed countries have high

Dollars (US, 2000)

SUPPORT RATIOS AND

Economic consequences of age

The relation between workers and

The support ratio

A high support ratio is favourable.

Niger first dividend:

First dividend for

Brazil is near the

For MDCs other than US, an annual decline of .6 to .8%.

Population ageing, savings and

The first demographic dividend is

The second demographic

Typically, adults accumulate assets over

The second dividend is

Longer life requires increased saving

The savings rate may decrease

Reaping a second dividend does not