Microglia become progressively activated and seemingly dysfunctional with age, and genetic studies have linked these cells to the pathogenesis of a growing number of neurodegenerative diseases. Here we report a striking buildup of lipid droplets in microglia with aging in mouse and human brains. These cells, which we call ‘lipid-droplet-accumulating microglia’ (LDAM), are defective in phagocytosis, produce high levels of reactive oxygen species and secrete proinflammatory cytokines. RNA-sequencing analysis of LDAM revealed a transcriptional profile driven by innate inflammation that is distinct from previously reported microglial states. An unbiased CRISPR–Cas9 screen identified genetic modifiers of lipid droplet formation; surprisingly, variants of several of these genes, including progranulin (GRN), are causes of autosomal-dominant forms of human neurodegenerative diseases. We therefore propose that LDAM contribute to age-related and genetic forms of neurodegeneration.