Demographic dynamics affect economic growth via savings and labour supply dynamics. A falling dependency ratio tends to translate into lower savings, while a rising old-age dependency ratio typically raises government expenditure on account of rising pension and health expenditure.
In Germany and Japan, the potential labour supply (population of working age) has already begun to decline. Not surprisingly, this has translated into a much diminished contribution of labour to economic growth. Investment has fallen in Germany, Japan and the US, resulting in a smaller contribution of capital formation to output growth than in the past. This has affected per capita real GDP growth in all three countries.
While Germany’s gross savings ratio has fluctuated between 20-25% of GDP since 1980, gross savings in Japan and the US have declined. Japan’s savings and investment behavior matches the demographic-economic model’s prediction most closely. By contrast, German (household) savings have held up well (and even increased). Germany and Japan run sizeable current account surpluses (= savings – investment), while the US has been running a deficit for several decades.
According to the OECD, old-age-related social expenditure rose from 8.2% of GDP in 1990 to 13% in 2009 in Japan. During the same period, it fell from 9.4% to 9.1% in Germany, while it rose from 5.2% to 6.1% in the US. Similar trends can be observed in terms of total social security expenditure .
Under current legislation, government spending on pension and health care is set to increase in all three countries. In spite of worse demographics, Germany and Japan seem much better positioned than the US in this respect. US government spending on pensions and health is set increase to almost 6% of GDP over the coming decades, while both Germany and Japan will experience far less dramatic increases. A lot will, of course, depend on how entitlement spending will be reformed in the coming decades. As of now, however, the US appears far less favourably positioned than Germany and Japan – despite a far more favourable demographic profile.
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| Source: IMF |