Economic support ratios and the first and second demographic dividend in Europe

Alexia Fürnkranz-Prskawetz, Vienna University of Technology
Joze Sambt, University of Ljubljana

Low fertility rates, increasing survival to old age and moderate levels of migration are rapidly changing the population age structure in Europe towards the elderly. To measure the challenge of population ageing for economic development, the dependency ratio or support ratio are often applied. Both of these indicators are based on a comparison of the working age population with the dependent population (elderly and young) where fixed age limits are used to distinguish between those population groups. However, not all people of certain age group are productive and the remaining ones unproductive. Furthermore, not all productive individuals are equally productive. On the other hand, not all individuals consume the same, which is implicitly assumed in the dependency and support ratio. The National Transfer Accounts (NTA) provide a new method for comprehensively analysing economic flows across age groups. In particular NTA provide detailed profiles of consumption and labour income by age. By combining these age profiles with population projections we simulate the development of an NTA based support ratio and its growth rate (the first demographic dividend) from 1960 through 2050. Depending on how elderly finance their consumption an increasing share of elderly in an economy can elevate savings, which through capital deepening increases the productivity in the economy (second demographic dividend). Based on estimates of NTA wealth flows we show that the second demographic dividend is negligible in most of the European countries we consider, except Germany, Spain and the UK.