1. Increase in the dependency ratio:If the retirement age remains fixed, and the life expectancy increases, there will be relatively more people claiming pension benefits and less people working and paying income taxes. The fear is that it will require high tax rates on the current, shrinking workforce.
2. Increased government spending:The government shall have to spend more on health care and pensions. Also, those in retirement tend to pay lower income taxes because they are not working.
3. Higher taxes:As the workforce is depleted inorder to maintain the same revenues to meet the expenditures there would be higher taxation.This could create disincentives to work and disincentives for firms to invest, therefore there could be a fall in productivity and growth.
4. Shortage of workers:An ageing population could lead to a shortage of workers and hence push up wages causing wage inflation.
5. Changing sectors within the economy:An increase in the numbers of retired people will create a bigger market for goods and services linked to older people (e.g. retirement homes).
6. Higher savings for pensions may reduce capital investment:If society is putting a higher % of income into pension funds, it could reduce the amount of savings available for more productive investment, leading to lower rates of economic growth.
The above effects could be countered with the following measures:
1. Increase participation rate:By making it easier for people past 65 to keep working.
2. Raise the retirement age:The retirement age could automatically be linked to life expectancy and can be increased proportionally.
3. Increase the importance of the private sector in providing pensions and health care.
4. Increase tax:To pay for pension costs givernments could increase the taxes.
5. Immigration:Immigration could be a potential way to defuse the impact of an ageing population because immigration is often from younger people.
The last measure of immigration is being sucessfully used in Europe to increase the workforce and thereby negating the affects of ageing.
Even Japan is considering this measure as their population is rapidly ageing.
These could be the case studies when India have to deal with this situation 30-40 years later.
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