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Dependency Ratio

The dependency ratio is the number of elderly people and children as a fraction of the number of working-age adults. For example, a dependency ratio of 30 percent would indicate that there are 30 children and elderly people for every 100 working-age adults. The definitions of the age groups may vary. For example, some calculations treat people between the ages of 20 and 64 as working-age adults, whereas others define this group as people ages 15 to 64. The ratio is intended to capture the size of the population that is too old or young to work, relative to the population that is capable of producing economic output; that is, it reflects the number of children and elderly who must be “supported” by each working-age adult. The aged (or old-age) dependency ratio is similar but includes only the number of elderly people as a fraction of the number of working-age adults.

An increase in the dependency ratio typically places additional stress on the public sector, as the working-age population must bear an increased tax burden to support programs for children and the elderly. The aged dependency ratio has particular significance for policy debates in the United States and other industrialized countries, where aging populations are putting a strain on public retirement programs and other programs targeted toward the elderly.

Trends and Forecasts

The aged dependency ratio in the United States (using the 20–64 working age definition) rose from 13.8 percent in 1950 to 20.3 percent in 2005. According to the latest projections of the Social Security Board of Trustees, this dependency ratio will rise rapidly between 2010 and 2030, reaching 34.9 percent in 2030. After that, it should increase more slowly, to 38.0 percent in 2050 and to 42.1 percent in 2080. However, significant uncertainty surrounding such forecasts exists. The Social Security trustees estimate that the dependency ratio in 2080 could be as high as 58.1 percent (the “high-cost” scenario) or as low as 31.6 percent (the “low-cost” scenario). A similar trend is occurring around the world, particularly in industrialized countries. According to official UN estimates, the aged dependency ratio (using working age as 15–64) for developed countries could rise from 22.6 percent in 2005 to 44.4 percent in 2050.

Changes in a country's dependency ratio can result from a number of demographic factors, including fertility, mortality, and immigration. Affecting the projected rapid increase in the U.S. dependency ratio prior to 2030 is the aging of the baby boom generation. Driving the more gradual, long-term upward trend is increasing life expectancy due to medical advances, combined with a low fertility rate. The period life expectancy for a 20-year-old in the mid-20th century was 71.2 years; by 2003 this increased to 78.4 years. Whereas the total fertility rate varied greatly over the past century, it has remained at around 2.0 children per woman recently (below the rate of 2.1 required to maintain zero population growth in the absence of immigration and changes in life expectancy).

Relevance for Fiscal Policy

The upward trend in the dependency ratio has significant implications for public sector programs, particularly Social Security and Medicare. In a pay-as-you-go (PAYGO) retirement program, the following mathematical relationship holds at every point in

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