Tipping point in 2029: the aging of Western populations is expected to put a strain on public finances

As Western populations age, fewer workers and rising costs will weigh on public finances, rating agency Moody’s warns.

Europe finds itself at the cusp of demographic change. According to the European Commission, the European Union’s population is expected to peak as early as 2029, “after which a sustained long-term decline will begin.”

The US Census Bureau does not expect the US population to peak until 2080 under its main projection, nor until 2043 under its low immigration scenario. Excluding the impact of immigration, population decline has already begun.

But according to Moody’s, aging-related budget pressures appear long before the population actually begins to decline.

Today, G7 economies have around three people of working age for every person over 65. This ratio is expected to fall to around two by 2050, putting additional pressure on growth and public finances, including health systems, according to Moody’s.

Population aging affects economies through slower economic growth, increased pressure on public finances due to pension and health care costs, changing consumer demand and changes in real interest rates and sovereign yields, Olivier Chemla, vice president of strategy and credit standards at Moody’s, told CNBC’s “Squawk Box Europe” on Friday.

In a report released last week, Moody’s forecast that the aging of the world’s population will have fundamental impacts on the global economy and lead to difficult policy decisions.

While population growth has long been a favorable factor for growth and solvency, falling fertility rates and the unprecedented speed of change in age structure are changing the situation, writes Moody’s.

“Fewer workers will limit production capacity, while fewer households and consumers will weaken demand. As a result, countries will have to rely more on productivity to support their growth,” the report said.

AI and increased productivity can only partially offset the long-term challenge of an aging workforce, Chemla said.

“This is a partial mitigation measure because you can certainly replace and improve the supply side of the economy in factories and services, but at the same time robots are not consuming – at least not yet – and so on the demand side there will always be this gap, which will slow down growth,” he added.

And it’s not just Europe and the United States, but also emerging economies that are aging rapidly. China’s share of the population aged 65 and over has doubled from 7% to 14% over the past two decades, with Brazil, Thailand and Turkey following similar trajectories.

These countries will face the costs of aging with much lower income levels than advanced economies that aged before them, the report said, noting that in Europe the same change took several decades.