Demographic Trends and Government Debt Dynamics in the US and Europe

This paper investigates the long-run impact of demographic trends on government debt dynamics in the United States and five major European economies. Using a dynamic model that integrates demographic projections into the intertemporal government budget constraint, we show that ageing populations exert upward pressure on debt-to-GDP ratios by dampening output growth, weakening primary fiscal balances, and causing a negative differential between the rate of output growth and the average cost of financing the debt. While Germany and the Netherlands benefit from relatively favorable demographic fundamentals and disciplined fiscal policy, countries like Italy, Spain, France, and the US face increasing debt sustainability risks. Counterfactual simulations highlight that sustained migration inflows and postponement of the retirement age can significantly mitigate these risks by improving the age structure of the population, raising growth, and lowering fiscal deficits. These findings underscore the importance of demographic-aware fiscal frameworks and the role of migration policy as a tool for macroeconomic stabilization.