Southeast Asia is getting older. Economies won't grow fast enough for the public sector to pay for increased pensions and public health care needs. Governments will continue to rely on families and the private sector to fill growing gaps in elder care.

Aging trends will slow economic growth and raise fiscal burdens of countries to support the needs of the elderly such as health care and pensions. It will also hurt companies reliant on domestic demand, as people focus more on saving.

In the next decade, the growth in working-age population in the region will slow to about 0.9% annually from 1.4% over the past decade. Growth will be 0% at around 2040, and workforces will then slowly shrink.

We estimate that the slowdown in growth in the working-age population will lop off about 0.25 to 0.3 percentage points of GDP per year over the next decade.

Moreover, the region will likely get old before it has the money to take care of retirees. When the region's elderly dependency ratio reaches 10%, its GDP per capita will be about a third lower than East Asia's was at a similar stage of aging, even adjusting for purchasing power parity. East Asia includes Japan, South Korea and Taiwan.

There is wide variation in the speed of demographic changes in the region. Thailand is facing the quickest demographic transition and economic impact. Vietnam will follow after that, and the rest of the region has a longer window before facing significant economic changes from aging.

To be sure, the Southeast Asian demographics are favorable compared with high-income economies and even to other emerging markets globally. But demographic changes are now underway that will materially hit GDP.

Live Long And (Gradually) Prosper

Southeast Asia has been youthful for a long time; the region has reaped large demographic dividends over decades. This is changing quickly. The changes are most visible in two key measures: working-age population growth and elderly dependency.

Over the coming decade, the region will face slower growth in the working-age population and rising elderly dependency ratios. This transition will squeeze economies through lower labor availability, higher savings for retirement, and greater fiscal demands.

The elderly dependency ratio measures the proportion of elderly to working-age adults. A higher elderly dependency ratio means the government has a thinner base of productive workers to tax, to support growing ranks of seniors in retirement.

While the working-age population is still expanding in Southeast Asia, its rate of growth is slowing. Over the next 10 years, the annual growth rate will fall by about 50 basis points. Elderly dependency will rise over the same period due to lower fertility rates and rising life expectancies.

This is a new phenomenon. It took 38 years (from 1980 to 2018) for the dependency rate to increase by 3 percentage points, but it will take only 12 years for the rate to rise by another 3 percentage points: to 9.9% by 2030.

Chart 1

There is large variation in the rate of demographic change across the region. Thailand faces the sharpest demographic change, with the working-age population set to shrink over the coming decade. In contrast, the wider region's working-age population will continue to grow, by about 1% per year over the same period.

Vietnam faces the second-quickest demographic change measured by the expected growth in working-age population over the next decade, with population growth slowing to under 0.7% annually in the coming decade.

Chart 2

We estimate that the drop in working age population growth implies a drop in GDP growth by about 0.25 to 0.3 percentage points per year over the next decade.

For a region that we expect to grow at 4.7% per year, this is not a sharp drop. However the growth impact is substantial in Thailand, which should see a hit of 40 basis points or more on current trend growth of around 2.7%.

Trend growth is the average growth of the economy over the past five years (excluding 2020-2021, or the COVID-shock years).

Moreover, the region is getting older before getting wealthy. When the elderly dependency ratio reaches about 10%, GDP per capita will be about $20,000 in purchasing power parity terms. By comparison, when the elderly dependency ratio was 10% in East Asia, its GDP per capita was about $30,000 on a purchasing power parity basis.

Other global emerging markets have a similar profile for elderly dependency as Southeast Asia. However, these other regions have the benefit of a higher initial GDP per capita.

Chart 3

Chart 4

The capacity of individuals and governments in Southeast Asia to fund a prolonged retirement period will be strained as the base of working-age adults shrinks. Challenges include changing savings profiles (individuals saving more while the public sector saves less), and an increased need for pension funding and other fiscal expenditure such as health care.

Societal factors that lower expectation of government support in retirement will help the region. People are more used to social and family support to provide aging-related health care and care-at-home services, rather than expecting the services from the government.

Demographic Change Will Have Large Economic Implications

Aging trends in Southeast suggest large shifts in the economy, particularly in saving rates and government's fiscal requirements.

Savings and consumption: 

Younger households have lower savings rates. Over the working-age years of 25-55 households build up precautionary savings. The rate of savings accelerates in middle-age households. Households then gradually spend their surpluses later in life.

We see this trend in savings data from the U.S. Consumer Expenditure Survey (see chart 5). While there will be global differences in behavior, we think the overall pattern of saving over age is comparable across geographies.

Chart 5

Another important aspect in the demographic transition is the aggregate income and spending profile by age group. Income and spending both rise with age until middle age and then decline. U.S. households follow this pattern.

What do these dynamics mean for Southeast Asia? The proportion of households with people in middle age or older is set to expand modestly. The biggest economic impact may flow from the reduced share of younger people who do not save.

Chart 6

The rising proportion of middle-aged households (and older) will translate into increased savings. At the same time, slower growth in working-age population will mean lower future demand and slower growth in loans and spending.

As higher savings meet lower spending, interest rates will fall. Part of the interest rate drop will be mitigated as infrastructure investment needs are still substantial.

Fiscal requirements:  Higher elderly dependency rates will lead to increased demands on government money. Public spending on health care requirements will rise, and public-sector social safety nets will require significant strengthening across Southeast Asia.

Pension systems will require public resources to meet commitments and to expand coverage to more households. Spending on infrastructure suited for the elderly will rise as well.

Aging additionally causes unfavorable shifts in the tax structure, as the ratio of taxpayers to those who don't pay taxes can fall.

There is some mitigation from the added fiscal needs due to Southeast Asia's traditional reliance on community and family for health care and welfare for the elderly. There is a low reliance on the public sector for these services.

Structural labor market changes can offset these changes. These may include higher labor-force participation rates, such as through the inclusion of more women in the workforce and higher retirement ages.

Governments Preparing For Aging

There is a strong awareness among governments about the economic impact of aging. All economies in the region have adopted strategies to address this shift. Policies in the region look at wide-ranging aspects of elderly welfare including health care, home or day care, active aging, pensions and social safety, elder-friendly infrastructure, and the capacity of the elderly to get care at home.

Thailand has the highest aging preparedness in the region, but also faces the most rapid rate of aging. For all economies, the fiscal demands of demographic transition will be large.

Table 1

One aspect of demographic transition is supporting the welfare of elderly households. Measures on this front include boosting retirement savings, expanding pension coverage, and strengthening social safety nets.

There are gaps in financial independence for elderly households, especially for vulnerable lower-income households that will not be prepared for retirement.

The other aspect is supporting the growth of the economy over the demographic transition, where policies can include:

• Bringing more seniors in the workforce, such as through skills training.
• Broadening labor force participation rates. This would increase the base of workers on which to support old people who have retired.
• Raise retirement ages.
• Raising productivity, ensuring that GDP continues to grow sustainably even as population growth slows.
• Use technology to enhance elderly care and to raise the productivity elderly workers.

A Difficult Adjustment Ahead

Demographic change has begun in Southeast Asia. This shift will be characterized by a gradual slowdown in working-age population growth and a marked increase in elderly dependency rates.

Demographic tailwinds to growth will ease in coming years alongside other economic shifts such as on savings rates and spending patterns.

Governments in the region recognize the coming demographic transition; they have been crafting policies to support elderly welfare. Some systems are better positioned. These include Thailand and the Philippines.

The region will remain a relatively youthful part of the world--Japan, Korea and China would be lucky to have the demographics of Southeast Asia. However, the region lacks the resources of East Asia, for example, to fund expanded pensions and senior care. The citizens of Southeast Asia may also find the slower growth stemming from the loss of their demographic dividend to be somewhat painful.