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However, the welfare state that emerged in the 20th century was built upon demographic conditions which are no longer present in many societies today. Across advanced industrial societies, sustained increases in life expectancy have significantly extended the period individuals spend in retirement. In many countries, people now live 20 to 30 years after leaving the workforce. Pension systems originally designed under very different demographic conditions struggle to remain financially sustainable given these new circumstances. At the same time, the demand for long-term care services has increased rapidly as populations age. Advances in medical technology and the growing prevalence of chronic diseases have also driven up healthcare costs. These trends place substantial financial pressure on welfare systems. Equally important is the decline in the size of the working-age population that supports these systems. The old-age dependency ratio — defined as the ratio of individuals aged 65 and above to the working-age population aged 20 to 64 — across OECD countries increased from 19 percent in 1980 to 31 percent in 2023 and is projected to reach approximately 52 percent by 2060. Demographic decline and market rationality The demographic transition is also the result of rapidly declining fertility rates, which are now below replacement level (generally estimated at approximately 2.1 children per woman) in almost all OECD countries. In many countries today fertility rates are significantly lower. South Korea presents the most extreme example of this trend. The country’s fertility rate was approximately six children per woman in the early 1960s. By the 1980s, it had fallen to around replacement level. In recent years, however, the rate has declined dramatically, reaching approximately 0.72 in 2024 — the lowest recorded fertility rate among advanced economies. To understand why fertility has fallen so sharply in advanced societies, it is necessary to examine the choices faced by younger generations. Many young adults delay marriage or decide not to have children. While these decisions are often discussed in cultural or psychological terms, they are also strongly shaped by economic rationality. Young people face intense pressure to secure stable employment and establish economic security before forming families. Education also plays a crucial role in shaping family decisions. In many societies, educational attainment has historically served as one of the most important channels for upward social mobility. As a result, parents often feel compelled to invest heavily in their children’s education in order to secure future opportunities — associated with substantial financial and emotional burdens. Under these conditions, choosing not to have children may appear to be a rational individual decision. Yet decisions that appear rational at the individual level can generate collectively undesirable outcomes. As the number of children declines and the working population shrinks, the long-term sustainability of economic growth and social protection systems becomes increasingly untenable. Savings accumulated over a lifetime may lose value if economic productivity stagnates and the overall population contracts. Firms face similar challenges. As the workforce shrinks, labor shortages will place upward pressure on wages. Technological innovation and productivity growth are unlikely to fully offset the effects of a rapidly declining population. In essence, societies confronting demographic decline find themselves in a “prisoners’ dilemma”. Rational choices made by individuals and firms in response to market incentives can produce outcomes that ultimately make society as a whole worse off.
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