In a staff discussion note (SDN) titled 'The Fiscal Consequences of Shrinking Populations' issued by IMF notes that population growth that implies the population doubling every 35 years or so is unsustainable. Nevertheless, shrinking populations pose a grave fiscal threat.

SDN elaborates: "Absent further reforms, age-related spending is expected to rise because of higher longevity and lower fertility in both more and less developed countries. Without the implementation of further reforms of public pension and health care systems, age-related outlays are expected to increase over 2015–2100 from 16½ to 25 percent of GDP in the more developed economies, and from 5½ to 16 percent of GDP in the less developed economies."

It continues: "The fiscal consequences of this outcome are dire: spending increases of such a magnitude could lead to unsustainable increases in public debt and, sharp declines in other spending, or it could necessitate large increases in tax rates that could stymie economic growth."

It adds: "declining populations can reduce economic growth and - if not accompanied by a commensurate reduction in interest rates—make it more difficult for countries to reduce their public debt as a share of GDP."

Pointing out that there is no escape from reforming entitlements, SDN says: "In the more developed economies, one priority remains to limit the excessive growth of health care costs."

It points out that further reforms would also be needed to contain the growth in pension spending, which seems relatively mild reflecting past reforms. Increasing retirement ages in line with longevity gains seems a promising option. In the less developed economies, the challenge is to strengthen public pension and health care schemes, while ensuring the expenditure increases are fiscally sustainable. Tax and spending policies encouraging higher labor participation rates for women and for young and old workers will also be necessary in both more and less developed countries.

SDN has concluded that a gradual pace of reform to pension and health systems would help to spread the burden across generations. There is greater urgency to move on health care as countries have been slow in implementing reforms in this area. In this regard, policy reversals should be avoided to circumvent disruptive adjustments in the future. In many countries, a multipronged approach will be needed, as it will be impossible for reforms to fully offset the impact of demographics on age-related spending.

In this context, many countries will need to strengthen their tax systems and improve the efficiency of public spending programs outside of pensions and health.