Comment on “Aging, Asset Markets, and Asset Returns: A View From Europe to Asia”

Abstract

The overlapping generation (OLG) model is a powerful tool to consider macro dynamicsinteracting with different generations. Iss ues involving intergenerational transactions andtransfers like the macroeconomic consequences of a pay-as-you-go pension system arebest analyzed using an OLG model. Using an OLG model, Borsch-Supan and Ludwig(2009) analyze the impacts of aging on the asset markets and asset returns, focusing on thechanges in productive capital and (endogenous) lab or. The novelty of this paper as claimedby the authors is threefold: First, it investigates how strong the “asset meltdown” effect is(i.e., the sharp decrease in the demand for financial assets due to the retirement of the babyboomers). Second, the impacts of labor and pension reforms on labor supply and savingbehavior are analyzed. Third, labor supply behavior is explicitly modeled. I would addanother novelty, namely, that the model can handle international capital flows between a“young” economy and the Old Economy.My comments relate to four issues: bequests, Asia, housing, and the exchange rate.First, bequests may significantly influence asset accumulation and decumulation in aneconomy. In Borsch-Supan and Ludwig’s model, “unintended” bequests are includedbecause the timing of death is uncertain. However, unintended bequests are assumed to beconfiscated by the government, so that they do not really act as intergenerational transfersto children. Intended bequests are explicitly excluded. There is research suggesting thatthe proportion of bequeathed assets, intended or unintended, is high (see Kotlikoff S Barthold & Ito, 1992). Therefore, in the future, I urge authors to extendtheir model to include bequests. Expected bequests may reduce the saving of the young,but the bequest motive may increase the saving (or decrease dis-saving, to be precise) ofthe elderly. When the economy is aging, the weight of the elderly may dominate and thesaving rate may be kept high. On the other hand, if the bequest motive depends on thenumber of children (i.e., per capital bequest enters in the utility function of the elderly),then the elderly may not save as much. I suspect that there is an empirical study suggestingthat childless elderly couples consume more on themselves than elderly couples withchildren. Most OLG models are based on individual decision-making, but when fertilityis an issue we need to model household decision-making. Aging can impose a big burdenon women if they have to take care of two sets of parents, which happens when a lone childmarries a lone child. This family problem is not solved in the usual OLG model.