This blog is based on Pension Research Council Working Paper 2025-05 “Global Aging and Growth: Is There A Silver Dividend?”
In the long run, the demographic transition toward aging populations is an inevitable global phenomenon. According to UN definition, 7% to 14% of the population is 65 years old or older in aging societies1. Even regions currently characterized by youthful demographics will eventually undergo population aging.
Consequently, population aging and its economic implications will become increasingly relevant even for developing countries. In fact, some SEACEN economies such as PRC and Thailand already find themselves in more advanced stages of the transition. The transition has begun in even younger SEACEN economies such as the Philippines, where fertility has fallen below replacement level. A recent SEACEN report analyzes how synergy between AI and human capital can mitigate the impact of aging2.
Economic Implications of Population Aging
Population aging is widely viewed as detrimental to economic growth. The most prominent channel emphasized in the literature is the decline in the working-age population, which slows the growth of the labor force. A relatively large labor force benefits economic growth.
For instance, the rapid expansion of the working-age population—commonly referred to as the demographic dividend—was a key driver of the remarkable economic growth in Asian countries. Now, as these economies undergo population aging, this demographic advantage is gradually giving way to a demographic deficit, adversely affecting their economic prospects.
Yet, a more optimistic view has emerged recently, as longevity increases and the older population becomes healthier. Better health enables older workers to remain longer in the labor force, raising labor force participation generating the so-called ‘silver dividend’—potential economic benefits arising from extended working lives in aging societies.
In particular, the adoption of technologies that help older workers work better can mitigate the negative effects of aging on economic growth. The silver dividend could substantially increase GDP.
Labor force is not the only link between population aging and economic growth
In addition to the labor input channel, there are at least three additional channels through which population aging affects economic growth.
- Older populations tend to dissave, thereby reducing aggregate savings and investment, harming capital accumulation and economic growth. Conversely, a reduced labor supply may encourage the substitution of physical capital for labor, leading to higher investment.
- A decline in the number of children allows parents to invest more in their children’s human capital, which can contribute positively to economic growth. The allocation of more parental resources to the education and skills development of each child results in a higher-skilled workforce and ultimately faster growth.
- Older populations affect productivity growth but the direction of the impact is uncertain. One view argues that population aging adversely affects growth because older persons are generally less innovative and entrepreneurial. Therefore, an increase in the proportion of older individuals slows technological development, which negatively affects total factor productivity (TFP). But another school of thought argues that population aging can positively influence TFP.
The underlying intuition is that labor scarcity creates stronger incentives for innovation. For instance, aging-induced labor shortages may accelerate the adoption of robots and automation, thereby speeding up technological progress.
All aging-growth links must be examined
To fully understand the effects of population aging on economic growth, it is important to examine the various channels collectively. In particular, the analysis should not neglect the potential silver dividend related to the positive impact of older workers working longer and thus expanding the labor force. Yet most existing empirical studies of the impact of population aging on economic growth fail to account for the silver dividend or all the channels
In their comprehensive analysis, Park and Shin (2025) address this gap in the literature by incorporating six major channels through which aging affects growth.
These are :
- Human Capital
- Physical Capital
- Average Working Hours
- Labor Force Participation Rate
- The Share of The Population Aged 15 & Over
- Total Factor Productivity (TFP)
Channel (4) represents the silver dividend while channel (5) is the demographic deficit due to population aging. Their study utilizes a sample of 166 countries, including both advanced and less developed economies, spanning the period from 1960 to 2019.
Silver dividend is overshadowed by the impact of TFP
The empirical analysis yields some interesting and significant findings. The analysis uses two indicators of population aging, namely (1) ratio of population 65 and above to total population and (2) ratio of population 65 and above to working-age population (age 15 to 64). The results for the two indicators are qualitatively similar. As expected, population aging had a negative and significant impact on economic growth. More specifically, a 1 percentage point increase in the old population share leads to a 0.23 percentage point reduction in annual per capita GDP growth rate over the next five years.
However, a negative impact on the labor force is not the main channel through which population aging affects economic growth. In fact, the demographic deficit or the reduction in economic growth due to the reduction in working-age population is completely offset by the increase in labor force participation rate. Extended analysis indicates that the increase in labor force participation rate is driven primarily by increased labor force participation of older individuals.
Apparently, the primary channel through which demographic transition reduces economic growth is by reducing TFP. Indeed the evidence indicates that the negative growth impact of aging can be fully explained by reduced TFP. Additional analysis suggests that the negative economic impact of older populations is more pronounced in more advanced, older economies than in younger emerging markets.
Improving TFP holds the key to sustaining growth amid population aging
The most significant and policy-relevant finding of our empirical analysis is that the adverse economic impact of population aging primarily stems from its negative effect on TFP growth, rather than from a reduction in the size of the labor force. This challenges the conventional wisdom that population aging inevitably leads to labor shortages, which, in turn, constrain an economy’s productive capacity. Consequently, policymakers in aging countries should prioritize strategies aimed at sustaining and enhancing TFP growth, rather than focusing solely on mitigating labor shortages
Therefore, to sustain growth in the fact of demographic transition, SEACEN economies should invest in technological innovation and adoption, human capital development, market efficiency and structural change, and infrastructure. They should be making such investments anyway since growth at middle income, which characterizes many SEACEN economies, depends more on productivity growth rather than adding capital and labor. But the specter of population aging adds a sense of urgency to improving productivity.
Implications for central banks
The key takeaway of the analysis is that sustaining rapid economic growth in the face of population aging requires creating a conducive environment for productivity growth. In addition to structural policies, central bank policies can also contribute to productivity growth, in particular innovation, a cornerstone of higher productivity. More specifically, high and variable inflation as well as monetary policy uncertainty can significantly undermine corporate investment in innovation. Transparent and predictable monetary policy creates a more stable and conducive environment for firms to engage in R&D and other innovative investments, which are inherently risky and long-term.
Thus our central finding reinforces the need for central banks to focus on their core mandate of low and stable inflation. In addition, central banks can use targeted lending facilities to provide lending facilities to provide low-cost funds to banks, specifically aimed at supporting high-tech or innovative industries and activities. More generally, central banks in countries experiencing rapid population aging would do well to consider the link between monetary policy and innovation in their policy calculus.
- In an aged society, more that 14% of the population is 65 or older and in a super-aged society, more than 20% of the population is 65 or older. ↩︎
- https://www.seacen.org/publication-doc/RP2-Harnessing-Synergy-AI-HRM-COMPILED-30Mar26-FINAL.pdf ↩︎