The world is undergoing a period of demographic transition which presents both opportunities and challenges for governments. A report by the Atlantic Council’s Mathew Burrows, formerly of the National Intelligence Council, Reducing the Risks from Rapid Demographic Change, examines the changes in population structures across high-, upper-middle-, lower-middle-, and low-income countries.

Within each economic bracket, countries are facing a full spectrum demographic changes from youth bulges to aging, post-mature populations. Both come with a complex set of political, social, and economic questions surrounding health care, pensions and retirement, education, and security.

The report categorizes nations based on World Bank standards. High-income countries are primarily European Union countries, the U.S., and other advanced economies. Upper-middle-income countries include nations such as China, Iran, and most South American countries, whereas lower-middle-income countries are nations such as India, Nigeria, and many Central American countries. Finally, low-income countries are predominately located in sub-Saharan Africa.

These groupings match up relatively well with groupings based on demographic structures. The report relies on data from the International Futures system developed by the University of Denver’s Pardee Center. Using this data, the Atlantic Council notes populations that have youthful (median age in the range of 15 to 25 years) or intermediate (25 to 35) age structures tend to be lower income. While those with mature age structures (median age between 35 and 45) and post-mature (45 to 55) tend to be higher income.

Beyond the Youth Bulge

The report notes that “civil conflict and instability – such as in the Middle East – are highly correlated with high birth rates and youth bulges.” The United Nations is also concerned about the potential of persistently high birth rates to slow down development and threaten stability.

But youth is as much a pathway to prosperity as a threat to stability. Large, young populations, if successfully educated and plugged into the workforce, can drive rapid economic growth. If fertility rates decline and economic opportunities are plentiful, countries can experience a golden opportunity called the demographic dividend. The ratio of people in the workforce increases relative to the number of dependents (the very you and very old), creating a surge in productivity.

A drop in fertility rates is essential to reaching the point where a demographic dividend is possible. In Africa, if “average total fertility rates drop to near replacement levels by 2035,” the report estimates, then “Africans would just begin to enter their demographic dividend years, boosting growth potential and per capita incomes.” If total fertility rates remain high or drop only very slowly, however, then there will not be a dramatic change in dependency ratio, leaving the demographic dividend out of reach.

For countries that do make these changes, getting certain education and economic policies right is the next step to achieving the demographic dividend. Ensuring access to education and vocational training should be a priority, as well as supporting the expansion of a job market capable of employing the vast population of working age people.

The consequences of not harnessing the demographic dividend are potentially serious. “A poorly educated African workforce has negative implications for long-term global growth potential,” writes Burrows. By mid-century, one in four workers will be African, meaning the world will heavily rely on the talents and skills of the African workforce to drive the global economy.

The Aging Dilemma

Another hidden opportunity for countries yet to go through the demographic transition is the opportunity to plan for the eventual transition to mature and post-mature age structures. Unlike the high-income countries now faced with the novel problems of a smaller workforce and higher health and pension costs, middle- and low-income countries have time to explore policy options to soften the blow.

The strain of retirees on pension and health systems is becoming a greater and greater drain on state resources in many wealthy economies, like Japan, Germany, and China, which is aging very quickly because of the effect of the one child policy. “By 2030 labor is expected to make a net negative contribution in high-income economies and make an even greater negative contribution in upper-middle-income economies (especially China) in the decades to follow,” the report finds. “To maintain the levels of growth enjoyed by countries over the past half century…productivity growth would need to increase at a rate of 3.3 percent a year, 80 percent faster than current levels.”

Aging presents problems on two fronts: a smaller workforce and subsequent economic slowdown, and higher health and pension costs. The report lays out three policy options to address these: raising the retirement age, reforming pension systems, and decreasing barriers to migration to encourage an infusion of skilled labor from more youthful countries.

None of these policy options alone are an easy fix. The recent strategy of countries with mature and post-mature age structures has been to either raise retirement ages or to increase tax or contribution rates. In high-income countries, pension spending as a percentage of GDP is expected to increase by three percent by 2035, according to the report. For upper-middle-income countries, the increase will be closer to five percent.

However, these efforts will not be able to keep pace with anticipated growth in demand on pension and health services, Burrows says. And major restructuring of pension systems, such as a shift from defined benefit schemes to defined contribution schemes, could be ruinous for elderly populations. On an individual basis, many people do not plan for long lives after retirement. The report estimates that the global gap between retirees’ savings and health care costs will grow to around $50 trillion by 2035.

Migrants could also rewrite the stories of aging populations. The report notes that in 2015, Germany admitted up to 1.1 million refugees, mostly from Syria and other conflict zones and most of them younger than the national median age of 46 (tied for Japan as the oldest in the world). That influx will actually reverse Germany’s aging trend for the next few years, “which translates to nearly $140 billion more in GDP annually.”

“Migration into societies with a declining labor force can relieve many of the economic and financial pressures associated with those declines so long as migrants can be economically integrated and productive,” writes Burrows. But, as illustrated by the global refugee crisis, such integration is easier said than done in today’s political climate and can present other social problems.

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The overarching lesson of the report is that smooth demographic transitions require planning. The youthful populations of lower income economies require expanded educational opportunities, good economic policies, and access to health care to lead their countries to the promised land of the demographic dividend. Younger countries also have the opportunity to learn from the mistakes of older countries and design their pension and retirement schemes to avoid the most detrimental economic effects of aging.

The wealthier economies of the world will need to either radically adjust pension and health care policies or begin admitting more migrants to offset the economic drag of aging. Few will argue that longer lives, better access to health care, gender equality, and more widespread education – all factors that contribute to declining fertility rates – are a bad thing. But policymakers nevertheless have to deal with a major restructuring of their economies.