The Impacts of Population Aging on Saving, Capital Formation, and Economic Growth

Abstract

The evolving population aging scenarios of the industrialized countries can be attributed to two major demographic dynamics: the declining fertility and fast aging population. The increasing old age dependency ratio, decreasing young dependency ratio, and shrinking share of working-age population in the aging economies generate substantial impacts on individual as well as aggregate consumption, saving and employment. Because retired people save less, an aging society with increasing proportion of retirees would experience a decline in aggregate savings, which in turn leads to lower capital formation and reduces economic growth. This paper focuses on the effect of population aging on aggregate saving, physical capital formation, and economic growth in Japan. The current study theorizes the effect of aging demographic dynamics on savings and capital formation. Taking into account the effects of population dynamics, saving, and capital formation together, this paper steps further in examining the implications of population aging for economic growth and discusses policy implications for the aging economy.