Global megatrend of fast aging societies looms large

Several Asia-Pacific countries are aging. This transition is neither unique nor limited to the region — it is a global megatrend. However, what is different is the speed at which the aging process is progressing. While France and Sweden took 115 and 85 years, respectively, to go from being an aging society — 7 to 14 percent of the population aged 60 or older — to an aged society-14 to 21 percent aged 60 or older — the same transition in China, Singapore, Thailand and Vietnam is expected to take only 19 to 25 years.

Compared with other global megatrends that are shaping economies, such as digitalization or climate change, demographic shifts are relatively foreseeable and slower by nature. This provides some misleading comfort to policymakers. The impact these shifts have on economies is far from simple, and analysts struggle to understand and quantify them.

The economy is the people. Therefore, demographic shifts stand out as one of the most influential factors shaping any aspect of an economy. Changing demographics means altering the essence and purpose of all economic activities. As the purpose changes, so do the needs. Changes in productivity, the share of the population in job markets, fiscal policy conduct and effectiveness, and how monetary policy affects economies — all these processes introduce high uncertainty into long-term economic and fiscal policy planning.

Why do analysts struggle with quantifying the economic impact of aging? The net change is a sum of multiple factors, often working in opposing directions. As people age, their productivity tends to fall. On the other hand, this trend is offset by technological progress, though to a largely unknown extent, making the net impact difficult to predict. Aging societies exhibit a shift in consumption from durables such as cars to essential services such as healthcare, thus affecting a country's composition of demand for goods and services and tax revenues. Aging also changes labor force participation.

The Economic and Social Survey of Asia and the Pacific 2024, prepared by the United Nations Economic and Social Commission for Asia and the Pacific, discusses how demographic shifts are reshaping economies in the region, fiscal policy and the overall development agenda.

In simple terms, the share of working people in aged societies is lower than in young ones. Furthermore, the more developed a society is, the greater the temptation is to withdraw from the workforce, as older people have the choice to quit early from the labor force and enjoy the comfort of retirement. In contrast, in developing societies, older people must work until very old age to avoid poverty.

Why is this a problem from the perspective of fiscal policymaking? First, policymakers would like to know how much goods and services are being and will be produced so that they can plan how to redistribute them through taxes and fiscal expenditures. In plain words, policymakers need to know how to cut and redistribute the "economic pie "or the GDP. It is not easy to predict its size in the future. Second, some fiscal expenditures increase and some fall as societies age. Fiscal expenditures on pensions rise along with healthcare and other forms of social protection. In contrast, education expenditures fall given less demand for children's education. Third, the exact scale and time of these shifts are not easy to determine.

However, governments do not have to remain passive observers of the demographic shifts, as they have multiple tools to soften the negative impact and boost positive processes. For example, premature retirement results in excessive burden on the fiscal system. However, reskilling and upskilling of older people can help retain them in the workforce, increase economic output and reduce poverty among the elderly. At the same time, governments can implement society-wide policies that support healthy and active aging. With the help of modern technologies and experience from other aged countries such as Japan, much can be done to keep people active into old age. All such actions not only improve the quality of life and economic performance among older people, but also directly alleviate the fiscal burden of pension systems as retirement is postponed.

Finally, all the challenges highlighted above and the policies needed to address them are closely linked. Therefore, policymakers should seek to address a few problems at a time looking for synergies. For example, greater investments in healthcare, education, social protection and environmental protection not only improve the quality of life but also allow people to stay employed for a longer period of time. A better environment improves people's health, which supports economic activity and decreases public spending needs for social protection and healthcare. In turn, saved social protection and healthcare expenditures can be used to support other development priorities.

This holistic approach must become the norm of government policy planning. Socioeconomic policies must embrace the idea of synergies between their goals, so that spending on one policy target also supports other goals.

The author is associate economic affairs officer at the United Nations Economic and Social Commission for Asia and the Pacific.