Aging Populations and the Size of Government

Abstract

Aging populations continue to put strain on government finances, as such demographic shifts cause fewer tax dollars and more citizens on pension programs. What effect does this have on the size of government across countries worldwide? We study this using the Economic Freedom of the World (EFW) index published by the Fraser Institute. One fifth of the index is comprised of measures of the size of government. We investigate whether the share of the population over 65 has a negative impact on this measure of the size of government, as well as whether it has a negative impact on the narrower measure of subsidies and transfers published in EFW. Using standard panel methods we find support for this hypothesis. These results are supported by the use of the aged dependency ratio as a robustness check.

Keywords: Economic Freedom, Size of Government, Public Finance, Demographics, Demographic Burden

JEL Classification: H50, H55, J11