Definition and Examples of Dependency Ratio
How to Calculate It
How It Works
Limitations
Definition and Examples of Dependency Ratio
The dependency ratio is an economic indicator that measures the ratio of people who are able to work to those who are not able to work. It determines the number of individuals who are likely to rely on others for support. The dependency ratio is an important indicator for analyzing the distribution of the population in the country and how dependents are cared for. The elderly citizens become a larger percentage in the dependency ratio in the United States, while the proportion of children decreases. This gap generally has negative implications for social security, as more people will draw from the program rather than contribute to it.
How to Calculate It
The formula for the dependency ratio used by governments and economists around the world is: (Y) = people aged 0-14 (S) = people aged 65+ (W) = workers aged 15-64
How the Dependency Ratio Works
The dependency ratio is the number of dependents in the population divided by the number of people who are able to work. It reveals the distribution of the population in the country and how dependents are cared for. This ratio can help the country in formulating policies and forecasting its financial needs. In the United States, it is commonly used to discuss the sustainability of Social Security and other social benefits because they are funded by collecting payroll taxes from working individuals.
For example, in fiscal year 2022, Social Security is expected to cost the federal government $1.2 trillion, and the Medicare program will cost $766 billion. Medicaid, designed for low-income individuals, will cost $571 billion. These two programs are funded by collecting payroll taxes from working individuals, meaning there must be a sufficient number of working individuals contributing to these programs to maintain their funding.
The dependency ratio in 1960 was 66.7%. By 1985, the ratio had decreased to 50.9%. It rose again during the early 1990s, then began to decline during the millennium period. Around 2010, the dependency ratio started to rise again, ending at 53.9% by the end of 2020.
The ratio continues to rise as more people transition from the baby boomer generation to age 65 or older. This is shown by the age dependency ratio for those aged 65 and above in the United States – in 1960, this ratio was 15.1%. At the end of 2020, it rose to 25.6%. Since 18.4% of the U.S. population are children under the age of 14, this means that 56% of the U.S. population supports the other 44%, according to the age categories used in the formula.
Note: This seems to be a warning bell for the current working population. They will have fewer children to support them when they become elderly.
Limitations
The estimates of the dependency ratio assume that all dependents do not work, and everyone else is working. In real life, this is not accurate. Not everyone aged 65 and older has stopped working. At the same time, many individuals aged 15 to 64 do not work, for various reasons.
One of the main limitations of the ratio is that it does not accurately reflect the transition of workers between age groups or the participation rate. For example, the labor force participation rate has declined over the past two decades – in 2000, it peaked at 67.3%. In 2021, labor force participation ranged around 61%, partially due to the recovery from the pandemic, but it was also affected by other factors.
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Thus, the U.S. Census Bureau found that while overall participation was declining, participation rates within each age category by state were rising. The bureau found this was due to the baby boomer generation moving from the working-age group but still working.
By 2030, the percentage of workers aged 65 to 74 is expected to increase by 5.3%, with the percentage of workers over 75 years old also increasing by 2.7%. This means that more people in the older age category will be working, reducing the number of people relying on younger generations for support.
The dependency ratio also fails to account for increasing longevity. People are living longer due to advancements in healthcare. Additionally, many professions are becoming more sedentary or can be done remotely. The baby boomers and younger generations have access to technology and the internet and continue to utilize them even in their later years.
People over the age of 65 today are in better shape than in the past and have more job options available today than ever before. Therefore, the dependency ratio may not accurately reflect the fact that people can and may choose to work longer in life.
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Sources:
– Federal Reserve Bank of St. Louis. “Long-Run Economic Effects of Changes in the Age Dependency Ratio.” Accessed Dec. 3, 2021.
– United Nations Department of Economic and Social Affairs. “World Population Prospects 2019.” Accessed Dec. 3, 2021.
– Office of Management and Budget. “Budget of the U.S. Government,” Page 39. Accessed Dec. 3, 2021.
– Social Security Administration. “Budget Overview,” Page 4. Accessed Dec. 3, 2021.
– World Bank. “Age Dependency Ratio (% Of Working-age Population) – United States.” Accessed Dec. 3, 2021.
– The World Bank. “Age Dependency Ratio, Old (% Of Working-age Population).” Accessed Dec. 3, 2021.
– World Bank. “Population Ages 0-14 (% Of Total Population) – United States.” Accessed Dec. 3, 2021.
– Federal Reserve Bank of St. Louis. “Labor Force Participation Rates.” Accessed Dec. 3, 2021.
– U.S. Census Bureau. “Aging Boomers Solve a Labor Market Puzzle.” Accessed Dec. 3, 2021.
– Bureau of Labor Statistics. “Civilian Labor Force, by Age, Sex, Race, and Ethnicity.” Accessed Dec. 3, 2021.
Source: https://www.thebalancemoney.com/dependency-ratio-definition-solvency-4172447
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