Falling fertility rates are propelling the major economies toward a major reckoning, according to a new study by the McKinsey Global Institute, one of the world’s leading management consulting firms.
As the report, entitled “Dependency and Depopulation? Confronting the Consequences of a New Demographic Reality [1]” confirms, a huge and growing portion of the global population now resides in countries where fertility rates have fallen well below the replacement threshold of 2.1 children per woman.
In Ireland, it is currently at 1.5. Only in sub-Saharan Africa are fertility rates still well above replacement level.
This trend indicates that, by the end of the century, several major economies could witness population reductions ranging from 20pc to 50pc. For instance, China’s population has been decreasing year on year, with a reduction of 1.4 million in 2024 alone, and in 2100 will have less than half of the current population. Like the rest of East Asia, China does not want mass immigration to help alleviate the problem. However, even if China were to try this approach, there are simply not enough people in the world who can come to China and balance out its population decline between now and the end of the century.
The big decline in fertility rates is creating a growing unbalance between generations.
With families shrinking in size almost everywhere, for the first time in history a sharply declining number of young people will have to support for a fast growing cohort of older people who are not working.
The report calls “first wave economies” those regions that are at the forefront of experiencing demographic shifts associated with declining fertility and ageing populations.
In what it calls ‘Advanced Asia’ (Australia, Japan, New Zealand, Singapore, and South Korea), ‘Greater China’ (Mainland China, Hong Kong, Macau and Taiwan) and ‘Western Europe’, there were 6.8 working-age individuals for every person over 65 years in 1997. Today this ratio is 3.9 to 1 and by 2050 it will fall to just two working age people for every retiree.
These changes pose challenges for economies traditionally reliant on a robust working-age demographic to support economic growth and social welfare systems.
To counteract this growing imbalance between the workers and those who depend on them – the McKinsey report claims – these countries would need to amplify productivity growth by two to four times the current rates or encourage individuals to work an additional one to five hours weekly. Moreover, retirement systems may require adjustments, potentially directing up to 50pc of labour income to cover the increasing gap between the financial needs and the income of the elderly population.
In confronting the consequences of demographic change, societies enter uncharted waters, according to the report.
“Even if global fertility rates were to jump overnight to the replacement rate, it would take 20 years, give or take, for those additional babies to become adults and begin contributing to economic growth through work”, the report notes.
The bad news is that no country so far has been able to return to replacement levels after falling below.
The report suggests that migration can play a role in addressing labour shortages but only for a short period of time because many developing countries, which currently supply a large share of migrants, are expected to experience their own demographic transitions, leading to reduced migration flows in the long term.