Does the old-age dependency ratio place a drag on secular growth?

Abstract

The secular stagnation hypothesis suggests that population aging (65+) places a drag on long-run growth, but this assertion remains a matter of debate. To address this issue, we use a panel of OECD countries for the years 1975–2014 to estimate the relationship between the old-age dependency ratio (population 65+/population 15–64) and secular growth (10- and 20-year intervals). Our empirical evidence clearly shows that the old-age dependency ratio has a negative effect on growth, confirming the demographic implications of the secular stagnation hypothesis. We also propose an overlapping generations model that explains this pattern in the data. Within this framework, optimizing households invest in their children's human capital and save for retirement. We show that an increase in the old-age dependency ratio reduces productivity through a reduction in human and physical capital as more resources are transferred to the elderly. This reduction in productivity results in slower growth and secular stagnation.