The Beginning of the End? Demographic challenges in the wake of COVID-19

By Peter Hourston

The COVID-19 pandemic has demonstrated that the biggest challenge facing countries across the world in the 2020s will be demographic transformation. Differences in national death tolls has highlighted a new dividing line between nations. Instead of splitting the world into Global North and Global South, or West and East, or even between rich and poor, this century will see economic divergence between ‘old’ and ‘young’ societies. This dichotomy illustrates the sharpening difference between states with aging, falling populations and those with younger, growing populations and the corresponding social, economic, and ultimately political, challenges that this entails. In their 2020 book The Great Demographic Reversal former LSE professor Charles Goodhart and Morgan Stanley economist Manoj Pradhan argue that the importance of global demographic changes is too often ignored by ‘mainstream’ macroeconomics and consider what may happen if future generations decide to ‘not to be born’. In other words, what happens when people start having too few children to replenish the population?

From a global perspective, forecasts indicate that by this century’s end, the world population will start to fall for the first time since the onset of ‘modern’ industrial driven economic growth in the late-eighteenth century. It is worth contemplating the general consequences of this phenomenon, before diving down into the international discrepancies. Some may welcome falling populations, given the potential environmental benefits from a decrease in demand for ‘natural capital’ – air, agricultural land, and water. Indeed, even before demographic effects kick in, the most destructive effects of climate change, arising from global warming over two degrees centigrade of pre-industrial levels, could also induce population decline, as famines, droughts and rising seas levels make some regions of the world uninhabitable. However, the spread of middle-class lifestyles from Europe and North America to East Asia and Latin America, with its combination of low-birth rates and higher life expectancy, still presents an equally severe challenge in itself. If the global population falls then will humanity enter a neo-Malthusian trap – the end of economic growth and development as we know it – as decreasing numbers of workers struggle to provide social welfare to ever expanding elderly populations? This would suggest an end to the reinforcing cycle of ever-increasing wealth and health, albeit unequally distributed internationally, that is now taken for granted by many.

Bringing a little economic theory into the equation can help uncover more. Italian-American economist Franco Modigliani’s life cycle hypothesis explains spending and saving decisions over an individual’s lifetime. The young, asset-poor, but with spending needs, borrow more, and then save in middle-age when individual income is highest, and the elderly spend. An efficient economy thus recycles wealth between generations. When incomes grow such that each generation is better off than their parents (as was generally the case in Western Europe and North America in the second half of the twentieth century) and populations grow, there will be more savers than spenders and net saving will be positive. Moreover, with rising incomes, aggregate saving by the young/middle-aged will eclipse aggregate spending by retirees, meaning higher economic growth causes a higher saving rate. This creates a savings ‘glut’ and the correspondingly (record) low interest rates that have occurred in the US, UK, EU and Japan in recent decades. Compounded with the large increases in the world’s labour force, thanks to the integration of China and Eastern Europe into global markets and the entry of more women into the workplace, there have been strong deflationary forces (as a positive labour supply shock reduces the bargaining power of labour). Consequently, real interest rates have also been low in the three decades since the Cold War ended, continuing their historical trend.

However, what happens when there is a fall in young people and increase in pensioners? This phenomenon is occurring in many countries. In Germany, a reduction in immigration due to the pandemic meant that the population fell by 40,000 in 2020. The impact of the one child policy has also seen new births fall in China since 2017 . Despite predictions elsewhere in this publication that COVID-19 could instigate a lockdown induced ‘baby boom’, this would go against the grain of current demographic fundamentals. Charles Goodhart and Manoj Pradhan offer some striking suggestions in The Great Demographic Reversal. Without major advances in productivity then growth in output will slow, and the sort of growth that Europe has seen in the decade following the financial crisis in 2008 will become normal. The worsening in the ratio between workers and dependents (children and pensioners) will induce inflationary pressures on prices (as there will be more people who consume but do not produce) and wages (as fewer workers have great bargaining power).

These conclusions are controversial and challenge much mainstream macroeconomic thought. Predicting an economic future that so significantly differs from the status quo is bold and opens up the book to detailed scrutiny. For example, technological change may open a route out of anaemic growth which would also reduce inflationary pressures as they bring down prices of common consumables (and therefore also nominal wages). Moreover, increases in retirement ages, as has already been occurring in many advanced economies, and the potential addition of millions of women to the workplaces of Sub-Saharan Africa and South Asia, will boost labour supply to offset increases in worker bargaining power. However, the former is fraught with political risk and the latter will also feed into birth rate decline, as increasing women’s education and employment are two of the strongest forces collapsing fertility.

Even if the predictions of Goodhart and Pradhan do not come to pass globally, it is necessary to examine the medium-run challenges that confront the post-pandemic world and brings us back to the divide between ‘old’ and ‘young’ worlds. It is in Europe and North America that some of the highest death tolls from COVID-19 have been recorded. Given this disease most severely affects those with comorbidities, and mortality increases sharply in the over-70s, this is not surprising. It is in the prosperous West that there are large numbers of vulnerable and elderly people who have made of the majority of pandemic death tolls. The widespread policy failure across most of the Europe to protect care home residents is especially striking. The risk to care homes became obvious from two events at the start of the pandemic. First, China released updated death toll figures from Wuhan in February which made clear the sharp uptick in mortality in the over-80s. Second, an outbreak onboard the Diamond Princess cruise ship demonstrated the near impossibility of proper infectious disease control of this pathogen in closed institutions. Closed institutions inhabited by the most vulnerable, namely care homes, have borne the brunt of this pandemic, sometimes making up over 50% of deaths in the first wave in Europe.

This takes us into the domain of politics, where the challenges posed by demography will be dealt with. The financing of welfare states, particularly health and social care, is a pressing problem. Care for the elderly is extremely labour intensive and it is unknown whether the kind of capital – sentient AI – that is required to look after a person with dignity and empathy will be developed (and would also meet regulatory approval). Advanced economies with shrinking youth populations will be increasingly reliant on immigration to provide care for their elderly. Advances in medicine has been able to make great strides in the treatment of traditional killers – cancer and heart disease – but not so much in the prevention of dementia, which will be an ever-increasing health problem affecting aging societies. As Goodhart and Pradhan point out, dementia does not acutely shorten lifespans, but rather cruelly degrades quality of life, as anyone who has seen a loved one be taken by this disease. Governments will need to prioritise research and development into dementia following COVID-19, such as gene therapy.

The fiscal challenges posed by the pandemic mean many countries lack the headroom required to meet the challenges posed by aging societies. Politically, it is difficult for governments to raise state retirement ages or take the axe to pensions or other benefits given to older people. However, maintaining existing levels of welfare for the elderly means levying higher taxes on workers, or encouraging higher levels of private saving, so the individual bears responsibility for personal consumption needs in old age. The latter is often impractical as young workers lack the discipline to forgo current spending for future (personal) welfare, so governments often choose the former. However, this can breed inter-generational conflicts, which is becoming increasingly evident in electoral results in certain democracies. Younger voters are resentful at paying for (in their estimation) freebies given to their grandparents, who often wealthy, at least in asset terms. Age is surpassing social class as the key discriminant in determining electoral behaviour in many advanced democracies, particularly when it is combined with the lightening rod of identity politics.  The 2016 Brexit referendum in the UK is perhaps the most consequential example of this, where older voters backed Leave in significant numbers, and the young tended towards Remain.

An important political concern since the 2008 financial crisis, has been the perception, at least, of rising inequality, in terms of both income and wealth across advanced economies.  Taking the former, while the returns to capital, especially human capital, has been much stronger than the return to real wages. Therefore, the owners of capital have benefited, and the non-college educated lower middle class has lost out. While these income-based inequality concerns go some way in explaining support for Brexit and Donald Trump among blue-collar workers in the UK and US, they do not necessarily explain why voting behaviour is increasingly differentiated by age. The inequalities in wealth, primarily property ownership, between older and younger people has become a key demographic problem. As people stay in education longer (due to the higher returns on human capital) and die later, then wealth accumulation is delayed. However, eventually this wealth will ‘tickle down’ to the next generation, an important process which is not considered by Modigliani’s life cycle hypothesis. By this decade’s end, American millennials will be five times as wealthy as they are today, as they inherit over $68 trillion in assets from their parents and grandparents. Therefore, wealth inequality needs to be considered through time, given how it is a function of age.

Although a major trend at the global level, not every region will experience an aging of society in this century. Sub-Saharan Africa will be the only major region to have a significantly younger population, which also requires attention. Over the next 30 years the region will become the world’s most populous, accounting for more than half of global population growth. This breeds a new sort of demographic problem: how to provide sufficient education and jobs for young people, since Africa’s dependency ratio is above 1, due to the large numbers of children. However, as these children become workers this ratio will fall, which puts Africa in a stronger position. Political and economic reforms are needed to provide employment for these workers and avoid a mass migration of youth north to Europe, which could have volatile geopolitical consequences.

The extraordinary events of 2020 should not make us lose sight of long-term fundamentals that shape our world. Demographic changes can take decades to materialise, but the effects of declining fertility will begin to be felt in the 2020s. How governments respond to this challenge will determine whether the populist, identity-driven politics of the 2010s can continue their success. Economists also need to pay greater attention to demography, to ensure wealth and health can be spread more fairly in the future.

The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.


Ando, Albert, and Franco Modigliani. 1963. “The ‘Life Cycle’ Hypothesis of Saving: Aggregate Implications and Tests.” The American Economic Review 53 (1): 55–84.

Goodhart, Charles, and Manoj Vasant Pradhan. 2020. The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival. Cham, Switzerland: Palgrave Macmillan. Available as an ebook at the University of St. Andrews library (SSO).

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