Working Paper: NBER ID: w2797
Authors: Alan J. Auerbach; Laurence J. Kotlikoff; Robert Hagemann; Giuseppe Nicoletti
Abstract: Demographic changes, such as those anticipated in most OECD countries, have many economics effects that impinge on a country's fiscal viability. Evaluation of the effects of associated changes in capital-labor ratios and the welfare and behavior of different generations requires the use of a dynamic general equilibrium model. The 75 generations - 250 year demographic simulation model, presented in Auerbach and Kotlikoff (1987, Chapter 11), has been modified to incorporate bequest behavior, technological change, the possibility that the economy is open to international trade, and government consumption expenditures that depend on the age composition of the population. The model has been further adapted to study the effects of impending demographic changes in Japan, the Federal Republic of Germany, Sweden and the United States. The simulation results indicate that these changes will have a major impact on rates of national saving, real wage rate and current accounts. One of this paper's fundamental lessons is that allowing for general equilibrium adjustments reduces the adverse welfare effects of increasing dependency ratios. Nevertheless, the welfare costs, and particularly their distributions across cohorts, pose serious challenges for policy makers in some cases.
Keywords: Aging Population; OECD Countries; Fiscal Viability; General Equilibrium Model; National Saving Rates
JEL Codes: J11; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increasing dependency ratios (J19) | national saving rates (D14) |
| increasing dependency ratios (J19) | real wage rates (J39) |
| demographic transitions (J11) | economic outcomes (F61) |
| policy changes (J18) | generational welfare (I38) |
| cuts in public pension schemes (H55) | welfare of future generations (I31) |
| cuts in public pension schemes (H55) | welfare of current generations (I31) |
| increasing social security contributions (H55) | real wages (J31) |