Reform and Support Systems for the Elderly in Developing Countries: Capturing the Second Demographic Dividend

Many third world countries face rapid population aging over the coming decades. The demographic trend poses two significant policy challenges – sustaining strong economic growth and establishing effective economic support systems for the elderly. This paper shows that the demographic transition presents two opportunities for more rapid economic growth. The first dividend arises because of the rapid growth of the productive population relative to the consuming population. The second dividend arises because the anticipation of population aging provides a powerful incentive for saving and capital accumulation. The second dividend will not be realized, however, if old-age security relies on transfer systems. In this paper our emphasis is on familial transfer systems rather than public systems. We show the importance of early reform that emphasizes the accumulation of pension wealth rather than continued reliance on the family. Given appropriate policies, population aging could lead to wealthier and more prosperous societies. This paper was prepared for the IUSSP/Asian Meta Centre “International Seminar on the Demographic Window and Health Aging: Socioeconomic Challenges and Opportunities,” Center for Health Aging and Family Studies and the China Centre for Economic Research, Peking University, Beijing, May 10-11, 2004. Lee’s research for this paper was supported by a grant from NIA, R37-AG11761.