The hidden impact of an aging population
Across much of the world, the same phenomenon is emerging: growing voter resistance to further immigration. Many citizens feel increasingly alienated from their own countries as more people arrive with different skin colors, religions, customs, values, and historical backgrounds. Some politicians exploit this sentiment, blaming immigrants for issues such as housing shortages, stagnating real disposable incomes, and rising crime rates.
Yet consider a country like Japan, where the population is rapidly aging and resistance to immigration remains strong. Even there, immigration is slowly increasing — for one simple reason: it is an economic necessity. The same applies to many countries, though political leaders often prefer to ignore it. The question is: how long can this denial continue?
In many nations, public finances are already under severe strain, with large deficits and high levels of debt. At the same time, economic growth is often weak or expected to remain sluggish. This combination is disastrous for future public finances. With slow growth, tax revenues rise only gradually, while aging populations create multiple pressures that worsen fiscal health:
- The highest healthcare and medical expenses occur toward the end of life.
- A shrinking share of the population must shoulder these rising costs.
- With the labor force growing only marginally — or even shrinking — severe shortages of care workers, doctors, and other essential professionals emerge. (The aging trend is driven not only by fewer births but also by increasing life expectancy.)
- An older population tends to save less, putting upward pressure on interest rates.
There are undoubtedly more effects, but the key question remains: how can this problem be solved? At the current pace, many countries risk entering a negative spiral. Low growth and demographic aging expand government deficits, which in turn push interest rates higher. Higher interest rates further suppress economic growth, increasing fiscal deficits through higher debt servicing costs — which then drive rates up even further.
Only two real remedies exist:
- Boost productivity growth, allowing economies to maintain output levels even with fewer workers.
- Increase immigration, expanding the labor force more rapidly.
The latter, however, is easier said than done. Beyond public resistance, many immigrants lack the necessary education or language skills to immediately integrate into the workforce. Training and integration take time and money — resources that are scarce given fiscal pressures. Financing this through higher taxes can suppress growth, while spending cuts tend to further inflame anti-immigration sentiment.
It is therefore understandable that many countries now seek highly educated immigrants who can quickly learn the language and adapt to their new environment. Yet few refugees meet these criteria — and many eventually return home once conditions improve. As a result, substantial investment in integration is often required before immigrants can contribute effectively, a policy for which there is limited political support.
This brings us to the current situation. Many now assume that large-scale investment in artificial intelligence will soon drive substantial productivity gains, supporting stronger economic growth. This has led to a growing belief that immigration is no longer essential. Consequently, more and more countries are implementing measures to sharply reduce or even halt immigration.
However, this overlooks a crucial fact: population aging inevitably reduces the size of the labor force. Even if productivity rises significantly, overall growth will remain modest — exacerbating fiscal imbalances.
This structural challenge cannot be fully solved by keeping people in the workforce longer or by increasing imports. Over the coming years, demographic aging will become an ever more important factor influencing interest rates, equity markets, and currency valuations worldwide.
