Dependency and depopulation? Confronting the consequences of a new demographic reality

Confronting the consequences of a new demographic reality AuthorsAnu MadgavkarMarc Canal NoguerChris BradleyOlivia WhiteSven SmitTJ Radigan EditorStephanie Strom Data visualizationJuan M. Velasco January 2025 Confidential and proprietary. Any use ofthis material without specific permission ofMcKinsey & Company is strictly prohibited. Copyright © 2024 McKinsey & Company.All rights reserved. Cover image: A silhouetted child soarsthrough the air on a swing set. Thesetting sun casts a warm glow on the scene,creating a quiet and nostalgic atmosphere.© SchulteProductions/Getty Images McKinsey Global Institute The McKinsey Global Institute was established in 1990. Our mission is to provide a fact base toaid decision making on the economic and business issues most critical to the world’s companiesand policy leaders. We benefit from the full range of McKinsey’s regional, sectoral, and functionalknowledge, skills, and expertise, but editorial direction and decisions are solely the responsibility ofMGI directors and partners. Our research is currently grouped into five major themes: —Productivity and prosperity: Creating and harnessing the world’s assets most productively—Resources of the world: Building, powering, and feeding the world sustainably—Human potential: Maximizing and achieving the potential of human talent—Global connections: Exploring how flows of goods, services, people, capital, and ideasshape economies—Technologies and markets of the future: Discussing the next big arenas of value and competition We aim for independent and fact-based research. None of our work is commissioned or funded byany business, government, or other institution; we share our results publicly free of charge; and weare entirely funded by the partners of McKinsey. While we engage multiple distinguished externaladvisers to contribute to our work, the analyses presented in our publications are MGI’s alone, andany errors are our own. You can find out more about MGI and our research atwww.mckinsey.com/mgi. MGI PartnersMekala KrishnanAnu MadgavkarJan MischkeJeongmin Seong MGI Directors Sven Smit (chair)Chris BradleyKweilin EllingrudSylvain JohanssonNick LeungOlivia WhiteLareina Yee Contents At a glance3Introduction4 1. The age of youth scarcity62. A lower-growth, higher-dependency future in first wave regions242.1. Demographic shifts, slower economic growth252.2. More workers, more hours, and more productivity needed352.3. A growing societal bill for dependency442.4. Older workers, older consumers553. Anticipating demographic shifts in later wave regions624. Responding to a new demographic reality71 Acknowledgments75Glossary76Endnotes77 At a glance —Falling fertility rates are propelling major economies toward population collapse in thiscentury.Two-thirds of humanity lives in countries with fertility below the replacement rate of2.1 children per family. By 2100, populations in some major economies will fall by 20 to 50 percent,based on UN projections. —Age structures are inverting—from pyramids to obelisks—as the number of older peoplegrows and the number of younger people shrinks.The first wave of this demographic shiftis hitting advanced economies and China, where the share of people of working age will fall to59 percent in 2050, from 67 percent today. Later waves will engulf younger regions within one ortwo generations. Sub-Saharan Africa is the only exception. —Consumers and workers will be older and increasingly in the developing world.Seniors willaccount for one-quarter of global consumption by 2050, double their share in 1997. Developingcountries will provide a growing share of global labor supply and of consumption, making theirproductivity and prosperity vital for global growth. —The current calculus of economies cannot support existing income and retirement norms—something must give.In first wave countries across advanced economies and China, GDPper capita growth could slow by 0.4 percent annually on average from 2023 to 2050, and upto 0.8 percent in some countries, unless productivity growth increases by two to four times orpeople work one to five hours more per week. Retirement systems might need to channel asmuch as 50 percent of labor income to fund a 1.5-time increase in the gap between the aggregateconsumption and income of seniors. Later wave countries, take note. —In confronting the consequences of demographic change, societies enter unchartedwaters.Absent action, younger people will inherit lower economic growth and shoulder the costof more retirees, while the traditional flow of wealth between generations erodes. Long-standingwork practices and the social contract must change. More fundamentally, countries will need toraise fertility rates to avert depopulation—a societal shift without precedent in modern history. Introduction Families across the globe are having fewer and fewer children. In much of the world, fertility rateshave fallen below the replacement rate required to maintain a sta