Working Paper: NBER ID: w13185
Authors: Alexander Ludwig; Dirk Krueger; Axel H. Boerschsupan
Abstract: Demographic change has differential impacts on the welfare of current and future generations. In a simple closed economy, aging -- a relative scarcity of young workers -- increases wages, increasing the welfare of the young. At the same time, population aging will reduce rates of return to capital, thereby reducing the welfare of asset holders who are usually older than the population average. In a global world with pension systems, however, these effects are less straightforward, since international capital flows dampen the factor price changes. Moreover, pay-as-you-go pension systems financed by payroll taxes create a wedge between net and gross wages, and their intergenerational redistribution has important additional effects on the welfare of generations. To quantify these effects, we develop a large-scale multi-country overlapping generations model with uninsurable labor productivity and mortality risk. Due to the predicted relative abundance of the factor capital, the rate of return falls between 2005 and 2050 by roughly 90 basis points. Our simulations indicate that capital flows from rapidly ageing regions to the rest of the world will initially be substantial, but that trends are reversed when households de-cumulate savings. In terms of welfare, our model suggests that young individuals with little assets and currently low labor productivity indeed gain from higher wages associated with population aging. Older, asset-rich households tend to loose because of the predicted decline in real returns to capital.
Keywords: Population Aging; Relative Factor Prices; International Capital Flows; Distribution of Welfare
JEL Codes: E17; E25; D33; C68
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demographic change (J11) | wages of young (J31) |
| demographic change (J11) | rates of return to capital (E25) |
| demographic change (J11) | international capital flows (F32) |
| PAYGO systems (H55) | intergenerational welfare (I38) |