Ageing's raging savings debate

Abstract

▀ Demographic changes have played a crucial role in pushing savings rates up and real rates down in the advanced economies. Despite some voices to the contrary, we think such forces will remain in place for many years to come. ▀ For such a predictable process, it's amazing that the economic implications of ageing are so hotly debated. Ageing affects everyone's lifetime savings decisions and has an impact on macroeconomic variables through several direct and indirect channels, the strength of which varies over time. ▀ The impact of ageing on savings depends on interpreting two distinct long‐term drivers. On the one hand, aggregate savings may start to fall as the baby‐boomer “bulge” in advanced economies transitions from the peak period of saving to the phase of lower saving in retirement. ▀ On the other hand, rising life expectancy should lead individuals to save more during their working lives or wait longer to retire. Greater labour market participation by those close to the official retirement age suggests that rising life expectancy is already leading many to remain in the workforce for longer – a trend that is likely to continue. ▀ Accounting for ageing and rising life expectancy together, we find there will be no major decline in savings even as the elderly's share of the population rises further. ▀ The impact on future real interest rates will, if anything, be negative. Comprehensive studies have reached a similar conclusion, taking into account the impact of demographic changes on savings, investment and other factors affecting real interest rates. ▀ Ageing populations may be complicating the escape from low global inflation. Crosscountry evidence suggests older populations may prefer lower inflation. As societies in advanced economies continue age, there is a downside risk to the long‐term outlook for inflation and bond yields.