The dependency ratio: who supports whom and how it feeds through to interest rates

The dependency ratio is the number of people outside working age divided by the number of people within its boundaries. The ratio says nothing about poverty, employment or productivity: it describes only the age structure of the population. A macro investor needs it not for its own sake but as a slow-moving variable that runs through the labour market, the spending side of the budget and the savings rate — that is, through labour supply, the volume of government borrowing and demand for debt instruments.

What exactly is counted, and where the catch lies

The denominator of the ratio holds people of working age; the numerator holds those who are younger and older than those boundaries. The ratio is usually split into a child component and an old-age component, because they behave differently and hit different spending lines: the child component falls on education and family benefits, the old-age component on the pension system and healthcare.

The catch is that the boundaries of working age are set administratively. The ratio changes not only when the population changes but also when the law changes: moving the boundary shifts a person from the numerator to the denominator, although nothing has happened to the person. That is why comparing the ratio across countries, and across periods governed by different legislation, has to be done with an eye on the definition rather than on how the term sounds. And another point: age is not employment. A person of working age may not be working, while a person above the boundary may be working and paying taxes. The ratio does not tell them apart.

Channel one: labour supply

When small cohorts enter working age and large ones leave it, labour supply contracts. For business this shows up not in demographic statistics but in the staff costs line: competition for workers pulls pay up faster than revenue. Labour-intensive models — retail, construction, transport, part of manufacturing — suffer more than businesses with a high share of capital per worker.

This can be read in the financial statements: growth in staff costs set against growth in revenue, and the trend in revenue per employee. It is worth looking at the series rather than at a single snapshot — in issuers' financial statements what matters is not the latest data point but the slope. The same place shows who passes rising costs on to prices and who absorbs them in the margin.

Channel two: the budget and OFZ supply

A pay-as-you-go pension system is built as a redistribution from those who work to those who receive payments. A rising old-age dependency ratio means that contributions fall short and the gap is closed by a transfer from the federal budget. A transfer is spending, and spending means either taxes or borrowing. Hence the direct link between demography and the volume and maturity of placements: a structurally growing deficit increases the supply of government debt and shifts the premium for long duration.

This is exactly why the increase in the retirement age, written into law in 2018 and being phased in step by step, is not a purely social measure but a fiscal one: it moves the boundary along which the ratio is calculated and spreads the fiscal effect over years ahead.

Channel three: savings and demand for assets

The life-cycle logic is simple: a person saves during the active phase and spends what has been accumulated afterwards. A population in which the share of saving cohorts is shrinking offers less capital supply and more demand for current consumption. Over a long horizon this is one of the arguments in favour of higher real rates — but it is not the only argument and far from always the main one; it is overridden by the regulator's policy, capital flows and external conditions.

For a private portfolio the practical conclusion is more modest: what changes is the structure of demand, not the promised return. An ageing population gives steady support to healthcare, pharmaceuticals, insurance and services for older age groups — and weighs on businesses built on cheap mass labour. This has to be checked against specific issuers in the list of stocks, not against a thesis about demography.

Russia's "echo of the nineties"

The distinctive feature of Russia's age structure is the collapse in the birth rate in the 1990s. It works in waves: first the small cohorts produce few schoolchildren, then few university graduates, then few parents — and the trough is reproduced in the next cycle. As a result, the dependency ratio here changes not smoothly but in steps, and the steps are known years in advance. This is a rare case in which a macro variable is predictable from dates of birth rather than from a forecast.

What does not follow from the ratio

A high dependency ratio does not mean a weak market. It sets neither the direction of the index nor the timing. This is a variable with a horizon of decades, whereas prices live on rates, earnings and flows — over such a horizon demography explains the backdrop, not the move. It is sensible to use it as a filter when choosing business models and as an argument about the structure of the budget, but not as a trading signal.

A useful distinction: the demographic burden is a measure of the population, the debt burden is a measure of a specific balance sheet, and the only thing they have in common is the word. The second is examined in the article on the debt burden. Related definitions are collected in the glossary, and the calendar of payouts on the securities that most often end up in "dividend" portfolios built for a long horizon is here: