The impact of demographic aging on government debt

Purpose This study examines whether demographic aging causes government debt. Design/methodology/approach Using a panel dataset of 61 countries from 2004 to 2023, we evaluate the possible causal relationship between the old-age dependency ratio and the debt-to-gross domestic product (GDP) ratio by employing fixed-effects instrumental variables models. We use the 15-year lagged life expectancy as an instrument for the old-age dependency ratio. Findings We find a statistically significant and positive relationship between the old-age dependency ratio and the debt-to-GDP ratio, providing evidence highly consistent with a causal effect. We find that the potential causal effect is nonlinear across different subgroups of countries. The effect is stronger in G7 economies and countries with net negative migration. The results indicate that demographic aging exerts upward pressure on government debt globally, regardless of other economic, political, or institutional factors. Practical implications Policy recommendations include increasing labor force participation among underutilized groups, increasing immigration, investing in automation technologies, and strengthening existing institutions to reduce debt amid rapid demographic aging. Originality/value This paper uses data from 61 diverse countries to examine the relationship between demographic aging and government debt. It contributes to the literature by identifying a potential causal relationship, highlighting nonlinear effects through subgroup analysis, and offering more targeted policy recommendations.