Differences between a programmed economy and a market economy

What is the dependency ratio?

The dependency ratio is the ratio of children and the population over 64 years old to the working-age population, or in other words, the ratio of young and old people who do not work and who depend on taxpayers for public services and social security, such as public pensions and education.

It is called the dependency ratio because a certain portion of the population depends on other portions of the population who pay taxes to finance public goods and services, from police to education to health care, and without the contribution of taxpayers, these services would not be available to their dependents.

The dependency ratio includes all people but does not include the working-age population. For example, people between the ages of 15 and 64 are considered "working age" and therefore not considered dependents. This helps economists, governments, banks, and other sectors to determine where a country is headed.

Countries with high dependency ratios indicate that the country relies heavily on its working-age population to pay its "dependents".This means that in the case of the elderly, there may be only two people to provide for their retirement and necessary public services.

This is especially important for policymakers. A higher dependency ratio means that there will be fewer people to meet the larger expenditures. This is especially problematic for countries with substantial public pensions. As older people begin to retire, the burden on the population, employees, and public funds become greater.

How is the dependency ratio calculated?

The dependency ratio can be calculated by adding the dependency ratio of children to the dependency ratio of the elderly, i.e., those who are 64 years old or older plus those who are under 15 years old, using the following formula

The dependency ratio is calculated by dividing (population aged 0-14 + population aged 65 and over) by the total population aged 15-64 and multiplying by 100.

Example of Dependency Ratio

To calculate the dependency ratio using Japan as an example, the population in 2018 is 126.6 million, and the population between 15 and 64 years old in the same year is 75.6 million. Furthermore, the population under 15 years old is 16 million, so the dependency ratio is calculated by dividing the number of people under 15 years old (16 million) by the working-age population (75.6 million).

Therefore, the child support ratio in Japan = 16 million / 75.6 million x 100 = 21.16.

Next, we calculate the dependency ratio for the elderly. Since Japan's population of 65 years old and above is 35 million, the dependency ratio of the elderly in Japan = 35 million ÷ 75.6 million × 100 = 46.3.

On the other hand, the total dependency ratio is 21.16 (dependency ratio of children) + 46.3 (dependency ratio of the elderly) = 67.46.

Consequences of a High Dependency Ratio

A high dependency ratio means that there are more "dependents" in the community than there are fewer working-age people. For example, if there is one dependent in the community, a dependency ratio of 10 means that there are 10 people who are dependent on that dependent, and the taxes paid by the working generation for pensions, education, or housing pensions are paid by that dependent. A high dependency ratio can have several consequences. For example, there are the following :

High Cost

An increase in the dependency ratio means that there are fewer people to pay, which in turn puts more pressure and cost on everyone to support dependents in the community.

If a retiree's income is $500 per week, this can be shared by 10 people for only $50 per person, but if the ratio increases, the same $500 must be shared by two people, which could mean $250 per person.

Lower Social Security

A higher dependency ratio means a higher burden on the working-age population, but since higher taxes are never popular, it could lead to lower spending.

It may be politically feasible to cut current spending for fear of political backlash, but that would mean cutting pensions and spending less on education and other social security.

Fiscal deficits

Raising taxes is politically unpopular, but so is reducing subsidy payments. The current administration may not want to do either in order to maintain political support. Its last option is to increase the national debt and borrow money.

This option could be disastrous in the long run, especially if the trend continues to worsen. Increasing the burden of debt and deficits could eventually lead to the bankruptcy of the country, making future borrowing almost impossible.

Solutions for High Dependency Ratios

High dependency ratios are a serious problem, and the government needs to do something about it: raise taxes, cut benefits, or increase borrowing, whichever is more favorable. On the other hand, solutions must also be found. Among these solutions to increase the dependency ratio are the following

Raise the retirement age.

This would allow the government to reduce the public pension it pays for the elderly. At the same time, it makes sense from an actuarial point of view since we are living longer than ever before.

However, a phased option has been proposed to "retire" the workforce so that the elderly spend fewer days as they reach retirement age.

Let inflation offset this.

Capping benefits is an unfavorable policy choice, and those who rely on Social Security may see their benefits drop from $300 to $250 per week, and the reduction may be noticeable.

What many governments do is allow inflation to erode these costs, so that as inflation increases, the benefits paid remain the same, or at least increase at a slower rate than inflation, and the effect of inflation reduces the actual cost.

Encourage young people to migrate

A number of countries are beginning to encourage young immigrants to help break the dependency cycle. This solves two problems. First, it will help solve labor shortages in areas such as agriculture, hospitality, and health care, and second, it will bring in people who can pay taxes to take care of the nation's dependents.

Promoting economic growth

Economic growth is another solution to rising costs. To reduce the number of dependents, the main solution is to increase efficiency, which in economic terms means economic growth through increased productivity.

A more productive working-age population means producing more output in the same number of hours or days, and the additional output produced can in turn be used to support a dependent population.

There seems to be a variety of ways to go about this, with some saying that deregulation is a positive thing, and others saying that Keynesian public spending is the way to go.