What Is the Dependency Ratio?

How to Calculate the Dependency Ratio

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The dependency ratio is an economic indicator of working-age to non-working-age people. It defines the number of people likely to depend on others for support.

Find out more about the dependency ratio, what it means for the general population, and what it means to economists and governments.

Definition and Examples of the Dependency Ratio

The dependency ratio is the total number of people too young or old to work, divided by the number of working-age people (15–64 years old). The dependency ratio measures the burden caused by non-working people on a nation's working-age population. The higher the dependency ratio, the greater the burden. Non-working dependents are defined as those up to and including age 14 and people aged 65 and older.

Alternate name: Age dependency ratio

You can find dependency ratios for countries worldwide from the United Nations, which calculates a dependency ratio for every nation every five years, going back to 1950.

How Do You Calculate the Dependency Ratio?

The dependency ratio formula used by governments and economists worldwide is:

  • (Y) = People aged 0–14
  • (S) = People aged 65+
  • (W) = Workers aged 15–64
dependancy ratio

How the Dependency Ratio Works

The dependency ratio is the number of dependents in a population divided by the number of working-age people. Dependency ratios reveal the population breakdown of a country and how well it can care for its dependents. This ratio can help a nation set policy and forecast its financial needs. In the United States, it is most often used to discuss the viability of Social Security and other social benefits because they are paid for by collecting payroll taxes from working-age people.

For instance, in the fiscal year 2022, Social Security is forecast to cost the federal government $1.2 trillion, and Medicare will cost $766 billion. Medicaid, designed for people with lower incomes, will cost $571 billion. Both of these programs are funded by payroll taxes collected from working-age people—meaning there needs to be enough people working and paying into them to keep them funded.

The dependency ratio in 1960 was 66.7%. By 1985, the ratio had dropped to 50.9%. It rose again through the early 90s, then began to decrease during the 2000s. Around 2010, the dependency ratio began to climb, ending up at 53.9% by the end of 2020.

The ratio continues to increase as more baby boomers turn 65 or older. This is demonstrated by the age dependency ratio of only those that are 65 and older in the U.S—in 1960 this ratio was 15.1%. At the end of 2020, it had skyrocketed to 25.6%. Since 18.4% of the U.S. population is 14 and under, this means that 56% of the U.S. population is supporting the other 44%, according to the age ranges used for the formula.

This sounds like an alarm bell for the current working-age population. They will have even fewer children to support them when they become seniors.

Limitations of the Dependency Ratio

The dependency ratio estimates assume that all dependent age groups don't work and everyone else does. In real life, that's not true. Not all who are 65 and older have stopped working. Meanwhile, many people aged 15–64 do not work for various reasons.

One of the main limitations of the ratio is that it doesn't accurately reflect the transition of workers between age groups or the participation rate. For example, the labor force participation rate (LFPR) has been falling over the last two decades—in 2000, it peaked at 67.3%. During 2021, the LFPR hovered around 61%, in part because of the recovery from the pandemic, but it was also influenced by other factors.

However, the U.S. Census Bureau found that while participation was declining overall, the participation rates within each age group by state were going up. The Bureau found that this was because baby boomers were transitioning out of the working-age group but were still working.

By 2030, the percentage of those working between the ages of 65 and 74 is projected to increase 5.3%, with the percentage of workers over the age of 75 increasing 2.7% as well. This means that more people in the older age group will be working, which decreases the number that depends on younger generations for support.

Longevity

The dependency ratio also fails to account for increased longevity. People are living longer because of the advances in health care. In addition, many careers are becoming more sedentary or can be worked remotely; baby boomers and younger generations have access to and experience with technology and the internet; many continue to use them well into their later years.

People over 65 today are in better condition than in the past and have more work options available today than ever before. Therefore, dependency ratios might not accurately reflect that people can and might choose to work longer in life.

Key Takeaways

  • The dependency ratio is the total number of people too young or old to work, divided by the number of working-age people. 
  • Dependency ratios reveal the population breakdown of a country and how well dependents can be taken care of. 
  • Older citizens are becoming a larger percentage of the U.S. dependency ratio, while the percentage of children is falling. 
  • This disparity generally has negative consequences for Social Security because more people will withdraw from the program than contribute.