On the fiscal challenge posed by transiting to a sustainable population level in aging societies: insights from a 4 epoch overlapping generations model

Expert opinion suggests the planet’s feasibly sustainable population size is roughly half its current level. Transition to a stable sustainable level requires maintaining a low fertility rate for an extended period followed by a return to the stable rate. A lower fertility rate changes a nation’s age structure, altering the configuration of its populations needs and its ability to service them, concomitantly increasing its fiscal deficit and dependency ratio. Here, the time profiles of fertility rates and dependency ratios over the last 60 years of over 200 nations are examined empirically to explore what the prospects for, and problems associated with, achieving sustainable population levels could be. To elucidate what the extent of the challenges could be, a four-stage fertility-based overlapping generations model of the life cycle is developed and employed to examine time horizons for sustainability, population growth, dependency ratios and workforce deficits. The fiscal challenge presented by these factors is exemplified in the case of the United Kingdom. The good news is that fertility rates are on the right trajectory for sustainability. The bad news is it will be a long time coming and the path is beset with short term real and fiscal challenges, furthermore it is unclear how the downward fertility trend can be reversed when sustainability is achieved.