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 (LAM), are defective in phagocytosis, produce high levels of reactive oxygen species, and secrete pro-inflammatory cytokines. RNA sequencing analysis of LAM revealed a transcriptional profile driven by innate inflammation 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, are causes of autosomal dominant forms of human neurodegenerative diseases. We thus propose that LAM contribute to age-related and genetic forms of neurodegeneration.