Abstract
This paper analyzes the impact of aging on capital accumulation and welfare in a country with a sizable unfunded social security system. Using a two-period overlapping generation model with potentially endogenous retirement decisions, the paper shows that the type of aging, i.e. declining fertility or increasing longevity, and the type of unfunded social security system, i.e. defined contributions or defined benefits, are important in understanding this impact. Moreover, the analysis provides a refinement to common policy recommendations that favor eliminating mandatory early retirement regulations in aging societies: aging leads to a greater increase in welfare when it is driven by an increasing longevity and the retirement age is unregulated. In comparison, when aging is driven by a decreasing fertility rate, a mandatory retirement system fosters more savings and, thus, income and welfare, in a closed economy with unfunded pension system based on defined contributions.
Highlights
Demographic aging poses a major challenge to all industrialized economies and a large number of developing countries
An example is the effect of aging on capital accumulation, a key determinant of growth, which we investigate in this paper
We use a two period overlapping generation model to show that the effect of aging on capital accumulation and welfare depend on: i) the type of aging, i.e. decreasing fertility or increasing longevity, ii) the type of unfunded social security system, i.e. defined contribution (DC), defined benefit (DB), or defined annuities (DA), and iii) the regulation of the retirement age, i.e. mandatory retirement vs. laissez-faire
Summary
Demographic aging poses a major challenge to all industrialized economies and a large number of developing countries. We use a two period overlapping generation model to show that the effect of aging on capital accumulation and welfare depend on: i) the type of aging, i.e. decreasing fertility or increasing longevity, ii) the type of unfunded social security system, i.e. defined contribution (DC), defined benefit (DB), or defined annuities (DA), and iii) the regulation of the retirement age, i.e. mandatory retirement vs laissez-faire. To fix these ideas, we set up an economic environment where each individual lives two periods.
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