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What is the dependency ratio?..and how to calculate it

What is the dependency ratio?

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

It is called the dependency ratio because a proportion of the population depends on the other side to pay taxes to fund public goods and services, these range from police to education to health care, without taxpayer input, these services would not be available to dependents.

The dependency ratio includes all people and not of working age. For example, people between the ages of 15 and 64 are considered “working age” so they are not considered dependents. This helps economists, governments, banks and other industries determine the course of the nation.

A state with a high dependency ratio indicates that the nation relies heavily on the working-age population to pay for services for its "dependents." This means that for one elderly person there may only be two people to fund their pension and other public services they need.

This is especially important for policy makers. If the dependency ratio increases, it means there will be fewer people paying for larger expenses. This is a particular problem for countries with generous public pensions. When older people start to retire, it puts more pressure on the population. employees and to the treasury to finance it.

How to calculate the dependency ratio

The dependency ratio can be calculated by adding the dependency ratio for children with the elderly dependency ratio, so those under 15 years old are added to those over 64 years old and the dependency ratio can be calculated with the following formula:

The equation for the dependency ratio is (the number of people aged 0 to 14 + the number of people aged 65 and over) divided by the total population between 15 and 64 times by 100.

An example of a dependency ratio

If we take Japan as an example of the dependency ratio, its population was 126.6 million as of 2018, and in the same year it had 75.6 million people aged between 15 and 64, with another 16 million under the age of 15, then the dependency ratio is calculated by dividing Those under 15 (16 million) over those of working age (75.6 million).

So Japan's child dependency ratio = 16 million / 75.6 million x 100 = 21.16.

We must then calculate the elderly dependency ratio, so in Japan the population over 65 years old is 35 million, so: Japan's elderly dependency ratio = 35 million / 75.6 million x 100 = 46.3.

On the other hand, the total dependency ratio equals 21.16 (child dependency ratio) + 46.3 (elderly dependency ratio) = 67.46.

Effects of a high dependency ratio

A high dependency ratio means that the “dependents” in the community are more dependent on fewer people of working age, for example, there may be a dependent person in the community and the dependency ratio may be 10, indicating that there are 10 people who depend on that dependent, and this means that the taxes that It is paid by people of working age towards their pension, education, or perhaps housing benefit. There are a number of effects that a high dependency ratio can have. Some examples include:

  • high cost per person

With an increase in the dependency ratio it means that there are fewer people paying for it, this puts more pressure and a higher cost on each individual to provide for dependents in the community.

If the retiree is earning $500 a week, that may be split among 10 people at $50 per person, however when the ratio increases it may mean that the same $500 must be split between two people, i.e. $250 per person.

  • lower social security

A higher dependency ratio means that people of working age have to pay more, yet higher taxes are never popular which can lead to lower spending instead.

Fearing a political backlash, it may be politically feasible to cut current expenditures, which could mean lower pensions or less spending on education or other Social Security benefits.

  • budget deficiency

Raising taxes is politically unpopular, but it also reduces subsidy payments. The current government may seek to do neither in order to retain political support. Their last option would be to increase government debt and borrow money instead.

This option can be disastrous in the long run especially if the trend continues to deteriorate. A rising debt burden and deficit could eventually cause the nation to default, making future borrowing nearly impossible.

Solutions for high dependency ratios

High dependency ratios lead to a serious problem, and governments have to increase taxes, reduce benefits, or increase their debts, any of them are favorable. On the other hand, it is necessary to search for solutions. These solutions to a higher dependency ratio include the following:

  • Raising the retirement age

One of the best solutions is to raise the retirement age, that way the government will pay less in public pensions for the elderly, at the same time we are living longer than ever so it also makes sense from an actuarial point of view .

However, a phased option has been proposed where the elderly can "phased out" from the workforce, so they will gradually spend fewer and fewer days as they reach retirement age.

  • Let inflation dampen costs

Limiting benefits is an unfavorable political option, and those who rely on Social Security may see their benefits drop from $300 a week to $250, the drop being visible and noticeable.

What many governments have done is allow inflation to erode these costs, so as inflation increases the benefits paid remain the same or at least increase at a slower rate than inflation, that way the real cost actually falls due to the effects of inflation.

  • Promoting youth migration

Many countries are starting to encourage young immigrants to come and help address the dependency ratio. This solves two problems. First, it solves labor shortages in industries like agriculture, hospitality, and care, and second, it brings someone who can pay taxes in order to care for dependents in the nation.

  • stimulating economic growth

Economic growth is another potential solution to increasing costs, since fewer people have to support an increasing number of dependents the main solution is to become more efficient, in economic talk this means economic growth through productivity gains.

If the working-age population is more productive, it means that they produce more in the same number of hours or days, in turn the additional output they produce can be used to help support the dependents of the population.

In terms of how to achieve this there are a number of ways, and some would argue that deregulation would have a positive effect here, while others would argue that a Keynesian approach to government spending would be preferable.


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