Does demographic change (such as population aging) affect financial stability?

Yes, absolutely, and the impact is quite substantial. This isn't like a stock market crash that you feel in a single day; it's more akin to the "boiling frog" analogy, slowly but profoundly altering the fundamental logic of the entire financial system.

Let me try to explain what's behind this in simple terms.

Imagine it as a Family's Money Bag

A country can also be seen as a super-sized family.

Young Adults (20-40 years old): This group primarily consists of individuals who live paycheck-to-paycheck and borrowers. They need to buy homes, cars, get married, and raise children, so they mainly borrow for consumption and save very little. They are banks' favorite customers because they need loans.
Middle-Aged Adults (40-60 years old): These are the pillars of the family. Their careers are stable, incomes are highest, children are growing up, and mortgages are mostly paid off. They start saving diligently for retirement. They buy large amounts of stocks, funds, bonds, and wealth management products. They are the financial market's biggest "buyers."
Seniors (60+ years old): They are no longer working and have no fixed income. They primarily live off their past savings (pensions, deposits, selling off investments). They become the "sellers" in the financial market.

Now, let's look at what "aging" means: fewer middle-aged adults, more seniors.

What problems does this lead to?

1. Asset Prices May 'Keep Falling'

Imagine a market where more and more people want to sell (seniors), while fewer and fewer people want to buy (middle-aged adults). What happens? Prices naturally fall.

Housing: With fewer young people, the demand for housing decreases. Seniors might need to sell off extra properties for cash to fund their retirement. Fewer buyers and more sellers weaken the upward momentum of housing prices, potentially leading to declines.
Stocks and Bonds: When a large cohort of "baby boomers" (mostly middle-aged now) begin to retire, they will collectively sell off stocks and funds from their retirement accounts to convert them into cash for living expenses. This immense selling pressure, if not met by enough young buyers, could lead to long-term downward pressure on stock and bond markets. This phenomenon has already been observed in Japan, known as a "balance sheet recession."

Most assets held by financial institutions (banks, brokerages, fund companies) are these very houses, stocks, and bonds. If these assets continuously depreciate, the financial foundations of these institutions will erode, potentially leading to problems.

2. Government's Wallet Shrinks, Risks Grow

An aging population delivers a double blow to government finances:

Revenue Side: Fewer working young people (taxpayers) naturally lead to reduced tax revenue.
Expenditure Side: More retired seniors mean pension and healthcare expenditures will snowball.

With less income and more spending, government fiscal deficits will grow larger. What's the solution? They can only issue more national debt to borrow money.

If too much national debt is issued, people will worry whether the government can repay its debts in the future. Once this concern spreads, it can lead to a sharp drop in bond prices and soaring interest rates, potentially triggering a sovereign debt crisis that could drag down the entire nation's financial system. Greece's debt crisis is a historical example.

3. Economic Vitality Declines, Banks Face Hard Times

Young people are the main force behind innovation and entrepreneurship. With fewer young people, society's innovative vitality will decline, and economic growth will slow down.

For Banks: In a sluggish economy, demand for corporate and personal loans decreases. Banks struggle to find good projects to lend to, and to maintain profits, they might take on excessive risks by investing in high-risk projects. Many banks did exactly this before the 2008 financial crisis.
For Insurance and Pension Companies: Their business model is based on actuarial calculations of "longevity risk." However, if the increase in average life expectancy exceeds expectations (which is part of aging), and investment returns decline due to economic stagnation, they will find that the premiums they collect are insufficient to cover future payouts. This could lead to a payment crisis for these institutions managing vast sums of money.

In Summary

Therefore, population aging is not an isolated social issue; it exerts immense and long-term pressure on financial stability through three main channels: asset prices, government finances, and economic growth.

It won't erupt suddenly like a financial crisis, but it will slowly erode the foundations of the financial system, making the entire system increasingly fragile and more susceptible to collapse when faced with external shocks (such as another pandemic or war). Central banks and governments worldwide are currently grappling with this issue, as it is a slow but almost irreversible trend.