Aging and Pension Reform in a Two-Region World: The Role of Human Capital

51 Pages Posted: 1 Mar 2012 Last revised: 19 Apr 2012

See all articles by Edgar Vogel

Edgar Vogel

Deutsche Bundesbank; Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA)

Alexander Ludwig

Goethe University Frankfurt

Axel H. Börsch-Supan

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA)

Date Written: September 13, 2011

Abstract

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.

Keywords: population aging, human capital, rate of return, distribution of welfare

JEL Classification: C68, E17, E25, J11, J24

Suggested Citation

Vogel, Edgar and Ludwig, Alexander and Börsch-Supan, Axel H., Aging and Pension Reform in a Two-Region World: The Role of Human Capital (September 13, 2011). MEA Discussion Paper No. 246-11, Available at SSRN: https://ssrn.com/abstract=2013979 or http://dx.doi.org/10.2139/ssrn.2013979

Edgar Vogel (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Strasse 14
Frankfurt am Main, 60431
Germany

HOME PAGE: http://www.bundesbank.de

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA) ( email )

Amalienstrasse 33
Munich, 80799
Germany

Alexander Ludwig

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Axel H. Börsch-Supan

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA) ( email )

Amalienstrasse 33
Munich, 80799
Germany

HOME PAGE: http://www.mea.mpisoc.mpg.de

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
44
Abstract Views
683
PlumX Metrics