Abstract
Population in developed countries has dramatically aged in recent years. At the same time, most of these countries finance their old-age public pension benefits on a pay-as-you-go (PAYGO) basis. Such a pension scheme combined with an ageing population, represent a financial challenge for the governmental budgets. Accordingly, several studies have been done on the effects of population ageing. In the present paper, the purpose is to study how population ageing will affect capital accumulation. A simple OLG model with PAYGO pension is applied. The formulation of the model makes it possible to deduce an explicit expression for this relation. It is shown that an increase in the elderly dependency ratio will increase the long-run capital stock.
Highlights
In the vast majority of countries around the world, the demographic structure is expected to change in the coming decades
That implies a smaller tax base, and higher pension liabilities. Motivated by these issues the current paper explores how population ageing affects capital accumulation, when the social security system is run as a PAYGO pension program
This paper is motivated by the ongoing debate regarding the consequences of population ageing
Summary
In the vast majority of countries around the world, the demographic structure is expected to change in the coming decades. Most of the countries that experience population ageing mainly rely on pay-as-you-go (PAYGO) pension systems At the time these systems where implemented, the first old generation did not contribute. Cutler et al [3] applies a Ramsey-Cass-Koopmans growth model and studies optimal policy responses to ageing They conclude that an optimal policy response could be to decrease the national saving rate and increase consumption. The government is assumed to be a social planner that maximize a social welfare function in order to respond optimally to an ageing shock Both of these theoretical contributions focus on whether an unfunded pension scheme is optimal in an ageing economy, based on welfare considerations. I will rather take the pension system as given, and consider growth issues when the economy experience higher dependency ratios due to lower fertility rates.
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