Question

It is a known fact the population of the United States and the world is aging, what are the economic effects if an aging population? How does the nation address this issue?

Answer 1

The effect of aging is massive and multifaceted. For an economy like Japan, the advent has long been proclaimed as expressed in the ways of weakening fiscal balance, shifts in savings and investment habits, and a shortage of labor supply has led to a decline in productivity and economic growth. However, for developing economies, this trend of rapid population ageing, before appropriate development, typically presents economic and social challenges, particularly in terms of sluggish economic growth and fiscal sustainability, namely a decline in tax revenues, an increase in government expenditure and a lack of adequate welfare systems

When people get older and hit their retirement age (about 60-65 years of age), their behavior shifts to spending less only on essential goods and services due to income constraints and fixed expenses. At the same time, declining working population due to population aging generates an effect by increasing savings and investment financial trends. On the one side, a reduced base of spenders, i.e. the workforce, with the introduction of a larger base of elderly people, i.e. retirees, contributes to a decline in aggregate usage. On the other hand, lower net income leads to lower domestic savings, reducing new investment.

The aging population leads to a deepening of resources and therefore a higher per worker production. There have been concerns, however, that aging populations may decrease an economy's total productivity in the sense of the ability of older people to adopt new technology and innovation. Elderly people are generally relatively slow learners for new technologies or strategies, which can hamper overall productivity with rapid technical progress in the face of a rapidly changing global economy. Without such power, there is a chance of increasing productivity and economic growth.

In order to cope with the shrinking workforce, greater involvement of senior and female workers should be promoted to preserve the size of the work force. A corresponding higher proportion of the working population would preserve or improve the tax-payer base, as well as help to reduce the amount of tax paid by the pension benefits transferred to the worker. Combining these two factors, the results will lead to I an increase in government's ability to raise more tax revenues, and (ii) a possible increase in productivity, accompanied by increased consumption, savings, expenditure, and thus economic growth.

The reform will concentrate more on expanding the tax base by reforming the tax system in order to rely more on other tax forms beyond individual income, such as corporate tax, excise tax and luxury tax. The other alternative is to scrutinize the individual income tax system in relation to the higher rates to raise the high-income tax base and change the middle-income tax base. Third solution feasible is to introduce tax reductions and bonuses as well as tax exemptions. These steps would also allow additional space for the fiscal balance of government.