Executive Summary
Money can’t buy more children. Among OECD countries, tax breaks, cash benefits and services granted for families and children corresponded to 1.8% of GDP. In the EU-27, the average share of government expenditures spend on family and children has increased from 1.6% in 2001 to 1.9% of GDP in 2023, ranging from 0.8% in Malta to 4.0% in Denmark. However, in many industrialized countries today family and children policy is not only considered an important element in preventing childhood poverty and smoothing consumption, but also as more or less subtle incentive to increase the fertility rate. The unprecedented decline in fertility rates in many countries calls the targets of today’s family policy into question, suggesting that just spending more money does not necessarily lead to higher fertility rates. This in turn raises the question of whether it would not be more important to focus family policies on guaranteeing that every child has the same chances irrespective of the parents’ income and to push ahead with the necessary measures to adapt labor markets and pension systems to the reality of aging societies. Even more so, if today’s critics of the UN population projections turn out to be right and the world population ages much stronger than expected in the long term.
Fertility rates keep declining, and it is hard to tell why. The unprecedented decline in fertility rates is a global phenomenon. In Germany, for example it has fallen to an average 1.35 children per woman, in Japan it dropped to 1.15 children and the US reported a record low 1.6 children per woman in 2024. However, no one can pinpoint the one single reason, that could explain this development, since fertility behavior depends on a multitude of factors, including women’s education attainment levels, the availability and affordability of housing and childcare facilities, the labor market situation, work-life balance and societal norms. In this context, efforts to rise the labor force participation rate of women to dampen the impact of demographic change on the labor market, the increasing cost of living, still-limited childcare facilities and unaffordable housing, especially in big cities, and an increasing share of young people who intend to remain childless, are likely to keep global fertility rates low for the foreseeable future.
Without a reversal of current fertility trends, the global population is set to peak earlier than expected and age much more than expected, which makes capital-funded pension provision all the more urgent. In the UN’s low-fertility scenario, the old-age dependency ratio in high-income countries would increase to almost 80% in the long run. This would mean a huge strain on tax- or pay-as-you-go financed pension systems, which will not be sustainable or provide an adequate standard of living in old age in the long run. Hence, pension systems will need to adapt to the needs of an aging population, and capital-funded pension provision will be critical.
Labor markets and companies also need to be adapted to the needs of an aging workforce population. The decline of the population in working age could be cushioned by an increase of the labor force participation in higher ages. If EU-27 member countries succeeded in gradually increasing the labor force participation rates in higher ages to levels already seen in Japan today, the number of people available on the labor market would increase from 221.7mn today to 228.2mn in 2041 – even in the low fertility scenario – before declining to 192.1mn in 2060, with 43% of them being 50 and older by then. Therefore, labor markets and companies need to be adapted to the needs of an aging workforce population, not least in order to incentivize older workers to postpone retirement.
Education is also key. While higher educational attainment does contribute to a lower fertility rate, it is also an important means to cushion the impact of demographic change on labor markets and economic growth, since the educational attainment level of the workforce population is positively correlated with productivity. Therefore, the decline in the number of children in the future should not trigger a cut in public spending on education. Instead, it should be at least kept stable in order to increase per capita investments in human capital.