Aging populations are not actually the reason governments are struggling to save money.
The link between an older workforce and lower national savings is actually a result of rising income levels rather than age. Wealthy societies save differently regardless of the average age of their citizens. Economists have long blamed demographic shifts for the decline in available capital for public investment. This decomposition proves that wealth, not demographics, is the primary driver of these shifting economic patterns. Governments should focus on income distribution rather than birth rates when planning for future financial stability.
Sectoral Savings Decomposition: Where Does Demographic Capital Come From?
SSRN · 6709378
Paper 1 in this series established that aging populations generate excess savings that flow abroad as current account surpluses. This paper asks: which sector generates the excess savings? Using a panel of up to 185 countries from 1990 to 2024, we decompose the demographic savings effect into government and private components using the Higgins (1998) polynomial specification (Z₁, Z₂, Z₃). The key innovation is an income-conditioned specification that replaces capital account openness with log GD