Advanced economies in Asia have among the lowest fertility rates globally, with an average of just 2.6 people of working age for every person 65 years or older, and that ratio will fall to 1.5 by 2050 unless steps are taken to reverse the trend. Yet, women in advanced Asia are having fewer and fewer babies—in Singapore, the fertility rate, or the number of children each woman would be expected to have over her lifetime, is 0.94.
The combination of falling birth rates and increased longevity has big implications for traditional retirement systems, which rely mainly on taxes levied on younger generations to fund transfers to seniors. Without rapid action to counteract the impact of demographic shifts, this established social contract will fray in unprecedented ways—even as economic growth flags.
Our new research found that shift has already knocked 0.2 percentage points off annual GDP per capita growth over the past 25 years in a region we call Advanced Asia, which includes Australia, Japan, New Zealand, Singapore, and South Korea. As birth rates decline further, they are likely to slow the growth of per-person incomes in Advanced Asia and China by an average of 0.4% annually over the next quarter century.
Raising birth rates is a long-term imperative, but even if every woman of child-bearing age had a child tomorrow, it will be two decades before their children’s work activities begin to have an impact on economic growth. In the meantime, countries will need to find ways to increase productivity, enhance workforces, and develop effective migration policies to sustain their economic engines.
Japan is ahead of the curve, which isn’t surprising given that its fertility rate has remained below the replacement rate of 2.1 children per woman since 1974. Labor force participation among those aged 50 to 79 years increased from 55% to 56% from 1997 to 2023, which may seem insignificant—until noting that workforce participation among elderly people in other countries typically falls. The number of working Japanese aged 65 years and older is higher than any country in Europe or North America. 82% of prime working age Japanese women work today, compared to 68% in 1997.
Other advanced Asian economies can take similar steps to maintain and enhance their workforces—or face stark consequences. South Korea’s fertility rate began declining more recently, and at a faster rate than anywhere else in recorded history. Its fertility rate today is 0.7, compared to 1.6 in 1997. If this low level persists, there will be only 13 grandchildren for every 100 grandparents in 2050. China’s fertility rate is not far behind, and if nothing changes, its population will decline to 633 million by 2100, or less than half what it is today.
Accelerating productivity, or the value of output produced by workers each hour, is another tool these countries can use. Advanced Asia historically has had high productivity growth—an average of 1.7% annually over the past 25 years, compared to 1.5% in North America and 0.8% in Western Europe. For example, China’s productivity growth rate is near legendary, an average of 7% annually from 1997 to 2023. Sustaining such increases will be next to impossible, however, and all the more so with declining populations.
Finally, it may be time for these economies to reconsider migration. In the past, net migration across Advanced Asia has been low or negative, but in recent years, Japan, for example, has begun reversing the picture.
Yet Advanced Asian countries have some structural advantages compared to their Western counterparts. They have made lower societal commitments to support seniors than Europe, for example, which helps contain growth in deficits due to demographic shifts. Australia and Japan make transfers to respectively cover 42% and 51% of the gap between an elderly person’s labor income and what they spend, compared to 59% in Germany and 76% in France.
By finding ways to engage older workers, increase productivity with the use of generative AI and new technologies, and effectively attract migrants, countries in Advanced Asia can bend the trajectory of their demographics and sustain their past success in economic growth. They could also be creative in shaping resilient retirement systems by emphasizing efficiency rather than bloating deficits. In doing so, they would chart a course for other countries in the region and beyond that will soon face their own demographic challenges.
This article originally appeared in Bloomberg.