What Is the Dependency Ratio?
The dependency ratio is the total number of people too young or old to work, divided by those of working age (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.
The World Bank releases a dependency ratio based solely on old age. It only reports on the proportion of senior dependents per 100 in the working-age population. Its formula is the number of seniors aged 65 or older divided by the working-age population aged 15–64. It doesn't count children.
- The dependency ratio is the total number of people too young or old to work, divided by those 15–64 years of age.
- Dependency ratios reveal the population breakdown of a country and how well dependents can be taken care of.
- Senior citizens are becoming a larger percentage of the U.S. dependency ratio, while the percentage of children is falling.
- This disparity has negative consequences for Social Security because there will be fewer younger people available to take care of seniors.
How Do You Calculate the Dependency Ratio?
The dependency ratio formula used by all except the World Bank is (Y) Youth aged 0–14 + (S) Seniors aged 65+, divided by (W) Workers aged 15–64 x 100.
The World Bank's old-age dependency ratio formula excludes children and is (S) Seniors aged 65+ divided by (W) Workers aged 15–64 x 100.
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 its dependents can be taken care of. This ratio can help a nation set policy and forecast its needs. In the United States, for example, it is most often used when discussing the viability of Social Security because those benefits are paid for with payroll taxes.
In fiscal year 2021, for example, Social Security will cost the federal government $1.092 trillion and Medicare will cost $694 billion. Medicaid, which is designed for low-income people only, will cost $447 billion and 23% of its budget goes to seniors and 19% to children.
The U.S. age dependency ratio in 2015 was 22.1. There were 47 million seniors divided by 212.1 million workers. This was greater than the 1960 ratio of 15.1. At that time, there were 16.5 million seniors supported by 108.8 million workers. The ratio has increased because so many baby boomers have reached retirement age.
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 in the dependent age groups don't work and everyone else does work. 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.
To be more accurate, dependency estimates should also include the labor force participation rate (LFPR) for each age group. The Bureau of Labor Statistics (BLS) estimates this for each 5-year increment from age 16 and older. BLS estimates show the LFPR is dropping overall in the United States because young people from ages 16–24 are choosing education and going to school instead of entering the labor force. That means the other age groups are taking up the slack.
By 2028, the percentage of those working after age 65 is also projected to increase to 9.4%. That's up from 2018 when 6.2% in that age group worked. Even with more people working beyond age 65, it doesn't offset that younger people are taking longer to enter the workforce because older people have more health problems, which is a cost to the economy.
The dependency ratio also fails to account for increased longevity. Seniors over age 80 have more health problems than younger seniors do. For example, 67% of women aged 65–74 have hypertension. Almost 80% of women 75 and over have the disease. That makes the cost burden on workers higher.
To plan for this, another age dependency ratio should be created for those in their 80s. The U.N.'s global data revealed there were 1.8 million seniors 80 or older in 1950. This very senior dependency ratio was 2. By 2015, the ratio had tripled to 6. There were 11.9 million seniors in their 80s or older being supported by 211.6 million workers.