Aging and Pension Reform in a Two-Region World: The Role of Human Capital
European Central Bank; Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA)
University of Cologne - Faculty of Management, Economics and Social Sciences
Axel H. Borsch-Supan
Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
September 13, 2011
MEA Discussion Paper No. 246-11
Projected demographic changes in industrialized countries will reduce the share of the working-age population. Analyses based on standard OLG models predict that these changes will increase the capital-labor ratio. Hence, rates of return to capital decrease and wages increase, which has adverse welfare consequences for current middle aged asset rich agents.
This paper addresses two important endogenous adjustments channels to dampen these detrimental effects of demographic change: investing abroad and endogenous human capital formation. Our quantitative finding is that openness has a relatively mild effect. In contrast, endogenous human capital formation in combination with profound changes in pension policy – fixing contribution rates and increases in the retirement age – have strong effects. Maximum welfare losses of demographic change for households alive in 2010 decrease from 6.5% to 3.6% when human capital endogenously adjusts and when the statutory retirement age is indexed to life expectancy.
Number of Pages in PDF File: 51
Keywords: population aging, human capital, rate of return, distribution of welfare
JEL Classification: C68, E17, E25, J11, J24working papers series
Date posted: March 1, 2012 ; Last revised: April 19, 2012
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