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Aging and Its Impact on Economies and Supply Chains

July 27, 2023


Don’t let anyone fool you. Growing old is inevitable yet seldom fun. In his book Fableheaven, author Brandon Mull wrote, “The curse of mortality. You spend the first portion of your life learning, growing stronger, more capable. And then, through no fault of your own, your body begins to fail. You regress. Strong limbs become feeble, keen senses grow dull, hardy constitutions deteriorate. Beauty withers. Organs quit. You remember yourself in your prime, and wonder where that person went. As your wisdom and experience are peaking, your traitorous body becomes a prison.” Unfortunately, countries can grow old and suffer the negative effects of aging as well. And those effects ripple through national economies in myriad ways. Countries find themselves growing older when people live longer, birthrates decline, or both.


Half-a-dozen years ago, Edan Prabhu, CEO and Founder at Prabhu Energy Labs, wrote, “It appears very likely that the human population will soon stabilize and may even start to decline. Fertility rates are dropping as women become more educated and gain better access to birth control. As fewer babies are born, the average age of the population increases; thus, our planet’s human population is getting older. Today some populations are already declining while others are rising. But soon, populations in most countries will begin to decline.”[1] He asked, “How will this change our society? … When growth and expansion are no longer automatic, when we are all growing older, and whenever larger numbers of us are no longer productive but instead need constant care, what happens to our social structures and our economic theory and our well-being?” Good questions.


Challenges Faced by Aging Nations


A few years back, the U.S. Census Bureau predicted, by 2035, people over 65 years old living in the United States will outnumber children for the first time in U.S. history.[2] As journalists Paul Overberg and Janet Adamy report, “Lower population growth could drag on economic growth.”[3] Prabhu explains, “When we are getting older, our health care costs rise. At the same time, with fewer people in the workforce our tax collections decline. Houses go empty. Schools close. Our need for roads, bridges, dams, and airports declines.” The U.S. is not quite at that stage; however, Japan has millions of empty homes they would love for someone to buy.[4] If birthrates don’t improve and xenophobic attitudes remain, the U.S. is headed down that path.


McKinsey & Company analysts note, “Greater longevity presents individuals, employers, and policy makers in the United States with significant opportunities to help older citizens live more purposeful, productive, and satisfying lives. … With many people now expected to live into their eighties or beyond, societies are set to benefit from their wisdom, energy, and perspectives. However, there will be many new challenges to face and questions to answer: How will the workplace adapt to an older workforce? How will financial planning adapt to longer periods of retirement? How will healthcare adapt to more complex and extended chronic care? And what role will government play in meeting these challenges?”[5] As the workforce ages — and more workers retire than enter the workforce — the business world will also have to adapt. Supply chains will have to turn more automation and organizations will have to pivot to meet the needs of older people.


Another, less obvious challenge, is that the nation will innovate less as the population ages. Prabhu wrote, “A lot of today’s innovation comes from young people, creating new and wonderful technologies such as the internet, smart phones, social media, and automation. Older people have difficulty adapting to these new technologies. What will happen to innovation as we all grow older?” According to a recent article in The Economist, innovation will suffer. The article states, “The rapid aging of many countries around the world will be bad not just for certain industries, or for governments whose costs rise as their revenues decline. The falling number of educated young workers entering the labor market will also reduce innovation, sapping economic growth across the board. Over time, this effect may prove the most economically damaging result of the greying of the rich world, eclipsing growing bills for pensions and health care.”[6] The article concludes, “The economic consequences of demographic decline are not only fiscal, however. Labor is one of the three main determinants of growth, along with capital and the efficiency with which both are used (productivity). Shrinking workforces, other things being equal, automatically lead to lower economic growth. But demographic decline also has knock-on effects on capital and productivity that are much less well understood.”


China, which once touted a one-child policy, now recognizes the ill effects of a declining population. If those effects are not mitigated, the world will feel the pain. Raymond Yeung, Greater China chief economist at ANZ, notes, “The trend of the old age dependency is going to rise … This is a warning not only for China, but also across the whole world, as China is the core of the supply chain. … Over the next few years, China will be losing 70 million (of its) workforce … so this is a big shock to the global supply chain.”[7]


Concluding Thoughts


Economics journalist Greg Ip notes, “As fertility falls and immigration tightens, the U.S. is losing its demographic advantage over other countries. … Aging doesn’t spell economic doom: Germany’s population is flat and Japan’s is falling, yet both boast lower unemployment than the U.S. But in the long run, job creation is constrained by the number of people of working age. … The U.S. has had two longstanding demographic advantages over other countries: higher fertility and immigration. Both are eroding.”[8] America has also been a land of innovation. A graying population will change that dynamic as well. As The Economist notes, “It is on productivity that demographic decline may have the most troubling effect. Younger people have more of what psychologists call ‘fluid intelligence,’ meaning the ability to solve new problems and engage with new ideas. Older people have more ‘crystallized intelligence’ — a stock of knowledge about how things work built up over time. There are no precise cut-offs, but most studies suggest that fluid intelligence tends to peak in early adulthood and to begin to decline in people’s 30s. Both types of intelligence are useful: companies, industries and economies need both youngsters able to respond to new challenges and seasoned veterans with a detailed understanding of their trade. But the two are not of equivalent value when it comes to innovation.”


The article goes on to note that automation and artificial intelligence may help. It notes, “A shortfall in human innovation may also be less damaging if offset by new ideas conceived by artificial intelligence. There seems no doubt that machines will soon be working out how to make incremental improvements in existing processes — indeed, in some spheres, they already are. Whether machines will ever learn how to generate disruptive new ideas, however, remains a matter of debate.” The bottom line is that aging will impact national economies and the supply chains that keep them fueled.


[1] Edan Prabhu, “How will we cope when there are too few young people in the world?” The Brookings Institution, 10 October 2017.
[2] Paul Overberg and Janet Adamy, “Elderly in U.S. Are Projected to Outnumber Children for First Time,” The Wall Street Journal, 13 March 2018.
[3] Ibid.
[4] Tim Hornyak, “Japan Has Millions of Empty Houses. Want to Buy One for $25,000?” The New York Times, 17 April 2023.
[5] Katherine Linzer, Binata Ray, and Navjot Singh, “Planning for an aging population,” McKinsey & Company, 31 July 2020.
[6] Staff, “It’s not just a fiscal fiasco: greying economies also innovate less,” The Economist, 30 May 2023.
[7] Weizhen Tan, “China’s aging population will be a ‘big shock’ to the global supply chain, says economist,” CNBC, 12 May 2021.
[8] Greg Ip, “The Demographic Threat to America’s Jobs Boom,” The Wall Street Journal, 18 December 2019.

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