Dependency Ratio

The number of dependent individuals compared to the age of the total population

What is the Dependency Ratio?

The dependency ratio compares the number of dependent individuals by age to the total population. Specifically, it measures people between the ages of 0 to 14 and above 65 to those who are 15 to 64. By doing so, it shows who is and is not working, which thereby signals how unemployment causes economic burden.

 

Dependency Ratio

 

Summary

  • The dependency ratio compares the number of dependent individuals by age to the total population.
  • The ratio indicates the economic burden that the employed will face due to the number of individuals who are unable to generate personal income.
  • To account for various limitations and discrepancies, it is recommended to make adjustments to the dependency ratio over time to reflect the accuracy or calculate it separately by age cohorts.

 

Utilizing the Dependency Ratio

The formula for the dependency ratio is the following:

 

Dependency Ratio - Formula

 

Where:

  • No. of Dependents – Those aged 15 and under + 64 and over
  • Working Population – Those aged between 16 and 63

 

When the dependency ratio is higher, it indicates that the working population faces a greater burden supporting the dependent population. Thus, the focus behind the metric is separating the working class from the non-working class.

The reason for separating the groups is due to the lack of potential generated income. Individuals who are less than 15 years old are unlikely to receive personal income due to employment regulations. Individuals who are above 64 would be considered elderly who is of retirement age, where they are not expected to be part of the workforce. Thus, for both groups, it is often necessary for the employed to provide outside support to accommodate their needs.

 

Understanding the Dependency Ratio

As the dependency ratio compares the working class to the non-working population, it becomes a tool for people to track shifts in employment. As the nonworking citizens rise, the working class will incur larger taxes to support those who are unable to provide for themselves based on law.

Often, the dependency ratio will be re-adjusted for people who are nearing the age of 65. As those who are seniors require more government assistance relative to those below the age of 15, the ratio must be shifted to more accurately reflect the aging population.

 

Dependency Ratio Example

In the finance world, there are 800 children under the age of 15 and 2,000 individuals at or above the age of 65. The working class consists of 1,500 individuals. Using the formula given above, the dependency ratio is calculated as follows:

 

Dependency Ratio = (2,800/1,500) * 100 = 187%

 

Downsides of the Dependency Ratio

It is important to be aware of the fact that the dependency ratio is purely based on age, and that particular criterion does not accurately reflect the economic burden the working population faces. For example, even though individuals are considered dependents above the age of 65, it does not necessarily mean that older people would not decide to continue to work.

In order to retrieve a more reliable estimate, the labor force participation rate for each age group should be considered within the calculation. The U.S. Bureau of Labor Statistics calculates the figure on a 5-year increment for ages 16 and up. As of currently, it can be perceived that the labor force participation rate (LFPR) is dropping.

It is evident in the U.S., as younger individuals are choosing to go to school and obtain an education rather than entering the labor market immediately after high school. Due to such reasoning, other working-age groups will likely be charged more tax to support the higher dependency levels.

The dependency ratio also does not account for longevity. Those above the age of 80 likely have more health issues than younger seniors, as their frail bodies are more prone to illnesses. For example, approximately 80% of women who are above the age of 75 have some type of sickness. Overall, the situation increases the cost burden on workers.

To mitigate the discrepancy, it is important to simply not rely on a single dependency ratio based on the criteria mentioned in the beginning. But more rather, another age dependency ratio should be accounted for those within their 80s. Based on the U.N.’s historical data, 11.9 million seniors in their 80s were supported by 211.6 million workers.

 

More Resources

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Demographics
  • Dependent
  • Natural Unemployment
  • Social Security

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