Demographics Are Not Destiny

More than just demographics, Head of Franklin Templeton Institute Stephen Dover and Investment Strategist Kim Catechis think education and government policy are of critical importance to economic growth.

Demographics as a driver of economic growth

Conventional wisdom points to young demographics being a driver of economic growth. The thesis is that young populations indicate a growing labor force, suggesting productivity gains long into the future. The reality is more complicated.

Many observers say China’s shrinking population is an indicator of the country’s economic slowdown. However, populations that are educated can fight the negative impact of aging via retraining and adapting the workforce to new technologies. In China, every two workers who retire will have had around six years of formal schooling. They are being replaced by 1.6 young people with around 14 years1 of formal schooling. The country is upskilling its labor force by default.

Having a lot of young people is clearly good, but they need to be healthy enough to work and able to learn the skills that are in demand in the labor market. We don’t need millions of Ph.D.s—but rather, a relatively well-educated pool of young people, because they are more easily employable. Given the trend toward automation and artificial intelligence (AI), the growth of the “knowledge” economy drives demand for skilled workers. A young, well-educated labor force tends to attract investment in high margin, productive areas, providing the positive driver for economic growth.

Pensions and healthcare

A wave of liabilities is growing around the world, driven by aging populations that imply significantly higher healthcare and pension costs. It is not about the number of young people; we think it is policy direction that matters. Governments that implement policies to encourage savings for pensions and invest in healthcare provision are less likely to be challenged.

Exhibit 1 illustrates the incremental cost of pension provision up to 2050, expressed as a percentage of 2022 gross domestic product (GDP). The colors denote each country’s position away from that optimum point of “demographic dividend.”2

Exhibit 1: The Economic and Fiscal impact of Aging Populations

The Economic and Fiscal impact of Aging Populations