Demographic impossibilities – and how we avert them

May 20, 2025When McKinsey Global Institute (MGI) was founded in 1990, the Berlin Wall had just fallen, and the world was entering a new era of globalization and transformation. Today, MGI foresees seismic shifts, driven by five interconnected forces that underpin economic and social life: geopolitics, productivity, technology, resources, and demographics. Among these, demographics stand out as a defining force shaping the future of economies, societies, and businesses.  

On average, the world will enjoy a seemingly manageable 0.4% annual population growth, reaching 10.3 billion people at peak in 2084 and then will start a gentle decline, according to UN projections. But that average deceives. Today, much of the developed world is aging and populations are shrinking, though populations in sub-Saharan Africa will continue to increase before beginning to age towards the end of the century. 

Yet increasing longevity explains only 20 percent of the demographic shifts sweeping the world – low birthrates drive the other 80 percent. The effects of low fertility rates are dramatic.  South Korea’s famously low fertility rate of 0.72, if sustained, would mean that 100 people entering adulthood today will have 36 children who, in turn, would have just 13 children – an 87 percent decline in two generations. 

Three waves

Reversing this trend is critical to increase economic growth and prosperity and sustain the social contract. As populations age, more older dependents will rely on a smaller cohort of working-age people. These higher dependency ratios will come in three different waves:

Wave 1 – underway in the developed world and China where working age populations peaked in 2010, and total population decline has already started.  

Wave 2 – emerging economies in Asia including India, the Middle East, Latin America where the share of working age people is just about to peak, and where fertility is often already below replacement rate.

Wave 3 – Sub-Saharan Africa where the share of people of working age keeps going up for another 50 years.

For a population decline as dramatic as that in Wave 1, we need to go back to the Black Death (Bubonic Plague), which killed off some 25% of the global population of 475 million people in the 14th century. Conversely, since the Industrial Revolution, growing populations have provided a “demographic dividend,” that boosted economic growth. In the last century, global population quadrupled and the non-farming workforce increased by 12 times – but this will not be repeated.

Impossibilities and imponderables 

MGI’s analysis of demographic trends highlight impossibilities and imponderables as the math that supported our societies in the past won’t add up in the future. Averting population collapse and devising new models of work and productivity are critical to increase economic growth and prosperity and sustain the social contract.

Without action, we will confront several impossibilities as the global population climbs to its peak at 10.3 billion in 2084, starting with how we’ll fund old age. In first wave countries, the productivity and taxes of four workers supports each retired person today, a ratio that will drop to two workers supporting one retiree in 2050. 

Additionally, work hours decrease with age and consumption rises, spurring dissaving and requiring government transfers for those 65 years and older. The percentage needed to cover the gap varies by country, ranging from 44 percent in the United Kingdom to 59 percent in Germany and 78 percent in Spain. 

Closing the gap entirely via transfers would require funding equivalent to a 33 percent tax on all worker incomes today in Western Europe, which would increase to a 46 percent equivalent tax rate by 2050, absent changes.

Additionally, the locus of global population will shift. First wave economies are home to 35 percent of the world’s population today but will only account for 18 percent by 2100, absent an increase in birthrates or migration. Over the same period, sub-Saharan Africa’s share will go from 16 percent to 34 percent. Given the region's relatively low levels of development, supporting a population 2.7 times larger than today could present significant challenges. 

To avoid these impossibilities, the social contract between old and young will need to be renegotiated, and many African nations will need to increase their productivity and living standards to create employment and economic opportunity for the continent’s growing population. For those living longer lives, it is key to promote healthy longevity, as well as to rethink work and learning, encouraging and supporting 50-year careers punctuated by several retraining episodes and career shifts. For working mothers and fathers, better childcare options, more flexible work arrangements, affordable housing, and public support can support bigger families.

As for the imponderables... 

Older populations have already dented GDP per capita growth in Europe by 40 basis points, although increasing productivity and growing employment among women has offset that drag. It’s hard to imagine annual GDP growth of 1 percent again unless AI lives up to its promise.

Additionally, adding hours to an older worker’s work week is hard. At 45, the average worker puts in 27 hours a week, but at 65, the same person will worker just 2 hours a week. Japan has extended the hours worked by its aging population and still the average 65-year-old there only works 7 hours a week. Of course, much could be done to improve wellness and increase labour force participation among older workers – and make early retirement less attractive. 

AI has the potential to take on or enhance 35 percent of work, which would add the equivalent of 2 percent to annual GDP growth over 15 years and greatly reduce the impact of demographic shifts. Such a productivity gain from automation is unparalleled in our history. 

A shortage of labour could induce wage inflation, turbocharged by the higher services consumption demand of older people – or a shortage of capital could induce high interest rates. Older people in retirement tap their savings to consume, reducing the supply of capital for investment. This drives up the cost of capital in the economy – and drives down the value of their remaining assets.

But the future demand for capital is unclear, given demographic shifts. More capital will be needed per (scarce) worker, in other words, wages will increase if productivity is to rise. Yet there are fewer and fewer workers in advanced economies. 

Many new workers in Africa could offset workforce decline, of course, but since older people consume more services that cannot be easily automated, the limited supply of working-age adults could drive up wages and inflation. Perhaps AI will take pressure off wages, but that remains to be seen. 

Migration could help counterbalance demographic shifts, though analyses indicate it would need to rise by two to five times the current annual volume to fully address these changes—an unlikely scenario. 

Some note that lower populations could deliver a climate dividend by reducing the strain on natural capital, but in our view, this is illusory since little can be done to reverse the impact of demographic shifts that will occur over the next quarter century. During that time, economic ructions will make investing in the net-zero transition much harder, and in any case, technology is likely to improve enough that it can sustain even more people – if we have them. 

Confronting a new demographic reality

We have a choice between a peaceful transition or collapse followed by rebuilding. Transitions tend to polarise societies by producing winners and losers. As several participants in a recent debate noted, young people, particularly young men, already feel they are getting a raw deal and voting for radical changes. Can we spark a fair transition that will quickly arrive at a “new normal”? Or will we sit by and watch our social contracts collapse, increasing uncertainty? 

Demographic change happens very slowly and, until recently, rarely captured headlines, making it easier for politicians to postpone much needed action to adjust policies to address it. Some markets already are bracing for rising yields on long-term government bonds may change that, as capital markets remain the forcing mechanism that pushes the need to drive action to address future challenges into the present. The maths that got us here – more and more workers, ever more generous entitlement programs, and strong growth in asset prices – will not compute in the era. Impossibilities must be transformed into new realities.

This post draws on recent discussions at McKinsey’s UK Board Intelligence Forum, an invitation-only platform for corporate board members to engage in thought-provoking debates on the key forces shaping the future of business and society.