As democracies grow old, it becomes harder to adopt sound economic policies
Across Western societies, mainstream parties have weakened, and movements built around grievance and identity politics have grown. Governing coalitions assemble with more difficulty, remain in office for shorter periods, and find their room for structural reform increasingly constrained.
France has had five governments in three years, Germany’s two Volksparteien (people’s parties) together represent less than half the electorate, and the US has entered an era of unstable majorities in which neither Republicans nor Democrats reliably reflect the will of the median voter.
Analysts have offered many explanations: the rise of China, the loss of manufacturing jobs, rising inequality, social media, partisan sorting. These factors matter. But a deeper structural force is often overlooked: population aging. By slowing growth and tightening fiscal space, it may contribute to an increase in political polarization.
The fiscal trap of an aging democracy
The working-age share of the population in advanced economies is projected to fall from 67 percent today to 59 percent by 2050. The Organisation for Economic Co-operation and Development (OECD) projects that rising pension, healthcare, and long-term care costs will increase public spending by around 6 percentage points of gross domestic product (GDP) across its members by 2060. As budgets shift toward age-related transfers, the fiscal space for public investment and economic adjustment shrinks.
The result is an upward ratchet on public debt. Governments that lack the political durability to reform spending and revenue structures borrow instead, passing the cost to successors. Aging and polarization together contribute to deficit bias—a dynamic in which successive governments from opposing parties extract common resources while no coalition fully internalizes the cost.
Governments then lose room to soften cycles or absorb major shocks, just as younger and middle‑aged workers face weaker prospects and become more receptive to populist appeals. Italy, for example, entered the COVID‑19 crisis with high public debt and limited fiscal space. Two years later, a right‑wing coalition came to power on a platform of protection and national sovereignty. In the United Kingdom, weak post‑pandemic growth and elevated debt are similarly constraining fiscal policy, just as voters punish the established parties and shift toward anti‑establishment alternatives such as Reform UK.
Three channels, one feedback loop
Demographics influence political polarization through three channels:
- The composition of public spending shifts as the population pyramid flips, redirecting spending toward pensions, healthcare, and transfers for older cohorts and crowding out the public goods that underpin productivity and opportunity.
- Generational wealth diverges across cohorts. In the United Kingdom, those born in the early 1980s had median net household wealth roughly half the amount that those born in the 1970s had at the same age. European Central Bank research documents declining wealth accumulation across successive European generations, while in the US, fewer young adults are reaching standard financial milestones even during periods of solid aggregate growth.
- Electoral mechanics react to shifts in age structure, as political outcomes increasingly reflect the preferences of older voters, who prioritize protecting pensions and health benefits and resist reforms that would disproportionately benefit younger cohorts. Across twenty-nine democracies, research finds a consistent pro-elderly policy bias.
These channels reinforce one another: demographic stress tightens fiscal space, intensifies struggles over the distribution of wealth (or “distributional conflict”), and deepens the very stagnation and frustration that fuel polarization.
Japan and South Korea are more advanced in their demographic transition than Western democracies and help illustrate the broader political and fiscal consequences. Japan’s one-party dominance and bureaucratic continuity have preserved social cohesion, but at the cost of an unreformed pension system, weak prospects for younger workers, and a political center of gravity that has shifted from taxpayers to pensioners.
South Korea presents an even sharper warning. Despite spending more than $200 billion on pronatalist policies since 2008, fertility has continued to fall, and demographic trends have generated pervasive anxiety about fiscal sustainability and long‑term growth. These developments threaten to reshape distributional conflicts and fuel intergenerational tensions over welfare and taxation. Electoral cleavages have emerged as older cohorts gravitate toward conservative parties, and some younger voters have been growing disillusioned with democracy and more open to strongman leadership.
Productivity is the key variable
The standard economic answer to adverse demographics is productivity growth: If each worker produces more, a smaller workforce can sustain living standards and fund the transfer obligations of aging welfare states. The OECD estimates that demographic headwinds could reduce GDP per capita growth by 0.4 percentage points annually over the next three decades, but that structural reforms could offset much of this drag.
The obstacle is political. Productivity-enhancing reform concentrates short-term losses while promising diffuse future gains. For example, liberalizing housing markets hurts incumbents, raising retirement ages provokes resistance from older workers, and productivity-inducing labor-market reforms threaten protected segments of the workforce.
And, indeed, polarization undermines the very remedy that could buffer demographic shocks. In the US, there is evidence that polarization could be linked to weaker corporate and aggregate investment, and a study across seventy-five countries finds that polarization reduces productivity by weakening institutional quality and policy consistency.
There are suggestions that artificial intelligence (AI) could provide a meaningful productivity boost in advanced economies. But it may also be accelerating labor-market polarization by rewarding highly skilled workers while hollowing out the middle. A technology that raises aggregate productivity while worsening distributional anxieties will not ease fragmentation on its own. AI could therefore mitigate some of the fiscal consequences of population aging, but it could also fuel societal conflict by increasing economic inequality.
Where governments can make a difference
Governments should first abandon the idea that they can reverse demographic decline through pronatalism. There are few indications that such policies can restore fertility to replacement levels in advanced economies, and some studies argue that the policies mostly impact the timing of births rather than the number of them. The focus should instead be on managing the consequences of aging in ways that preserve social cohesion.
Three areas matter most. First, governments should contain their age-related spending more credibly. Sweden’s pension reform, for example, includes automatic adjustment mechanisms that depoliticize benefit changes—an approach recently presented by an expert committee to the German government. On healthcare, OECD research suggests that disease prevention and better price-setting mechanisms can contain costs more effectively than blunt caps. Moreover, governments could extend the mandate of independent fiscal councils to make the intergenerational effects of public policy choices more transparent.
Second, governments should make structural reforms with a focus on the wealth and opportunity gap between generations. Housing is key in this regard: When supply is constrained, older generations see the value of their assets rise, while younger generations find it difficult to afford real estate. Moreover, active labor-market policies—targeted retraining, job placement, and temporary wage subsidies—can help workers adapt to technological and structural change and reduce the appeal of grievance politics.
Third, since polarization is often strongest in regions left behind by economic transformation, governments must consider place-based policies. Such measures include targeted investment in infrastructure, broadband, and local institutions. Financing for small firms can improve productivity in structurally weak areas, even if employment gains are harder to sustain.
Another policy option, in principle, is for aging countries to encourage foreign workers to come and shore up the labor force, broaden the tax base, and alleviate staff shortages in sectors such as healthcare. But this has proved to be a partial answer at best. Migration supports labor-force growth most effectively when labor-market matching and integration are strong; otherwise, the economic gains are diluted while the political backlash intensifies. That leaves many governments in a bind: Countries need more workers, but higher migration can also sharpen tensions over housing, public services, identity, and social cohesion—which are among the issues that have contributed to political polarization in the first place.
No easy way out
Indeed, none of these approaches is easy. Each requires a political consensus willing to accept short-term losses for medium-term sustainability—precisely what fragmented democracies find hardest to build. Countries that cannot form such consensus face either sharper policy swings as power changes hands or a gradual erosion of the democratic order as institutions fail to deliver. In many cases, a durable reform coalition may not emerge until a crisis or major political realignment changes what is feasible. The demographic constraint, therefore, needs to be made clearer to electorates, its intergenerational effects governed more equitably, and the coalitions capable of doing both built before crisis makes the choices even harder.
Martin Mühleisen is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and a former International Monetary Fund official with decades-long experience in economic crisis management and financial diplomacy.
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Image: Grandma with wheeled walker. architecture background crumbling due to neglect in a depressed area district industry ruins. Old-age poverty concept