Population ageing is expected to raise the debt and financing requirements of many advanced economies in the coming decades, according to a report by Moody’s Investors Service released on March 4. In addition, a shrinking labour force and lower private domestic savings due to a growing ageing population will constrain funding for governments in those economies.

The report notes that the twin pressures of shrinking labour force and lower private domestic savings will leave politically challenging fiscal consolidation, higher interest rates and central banks holding more considerable government debt as potential adjustments. Increased borrowing needs amid lower household saving flows mean new or additional financing gaps for countries with ageing populations. “In the near to medium term, household saving rates may rise in anticipation of more time in retirement.

However, empirical evidence suggests that over the longer term, population ageing is likely to lower household saving rates as the proportion of retirees to the working age population increases,” says the report. According to the report, advanced economies will witness a negative savings flow (decline in stock of savings) because workers tend to save for retirement during their active working years, then use the accumulated savings to supplement their disposable incomes once they reach retirement age.

This implies that even if saving rates are stable across age groups, a falling share of productive workforce and a rising share of the retirement population will lower average household saving rates across the nation over time. Unlike previous generations, citizens are preparing to spend a longer time in retirement due to an increasing life expectancy as a result of better healthcare and medical research, which adds to the domestic expenditure, says the report.

Read more @The Edge Markets