Should America Save for its Old Age? Population Aging, National Saving, and Fiscal Policy

48 Pages Posted: 3 Aug 2000

See all articles by Douglas W. Elmendorf

Douglas W. Elmendorf

Harvard Kennedy School

Louise Sheiner

Board of Governors of the Federal Reserve System; National Bureau of Economic Research (NBER)

Date Written: November 1999

Abstract

While popular wisdom holds that the United States should save more now in anticipation of the aging of the baby boom generation, the optimal response to population aging from a macroeconomic perspective is not clear cut. Indeed, Cutler, Poterba, Sheiner, and Summers ("CPSS", 1990) argued that the optimal response to the coming demographic transition was more likely to be a reduction in national saving than an increase. In this paper we reexamine this question. In particular, we ask how the optimal saving response depends on the openness of our economy, on how we view the consumption of children, and on the existence of pay-as-you-go transfer programs like Social Security and Medicare.

We find that, if the United States were a small open economy and world interest rates were fixed at their current level, the desire to smooth consumption as our population aged would lead us to increase saving today. But the optimal response in a closed economy is much less clear cut, as slower growth of the labor force will push down the rate of return on capital and diminish desired saving. For reasonable parameters, the optimal response to our aging population in a closed economy is likely to be small -- either a small decline in national saving or a small increase. We also explore the role of the government in population aging. Government programs can influence consumption if they affect the capital-labor ratio or the relative weight that society places on the consumption of the elderly.

Keywords: aging, saving

Suggested Citation

Elmendorf, Douglas W. and Sheiner, Louise, Should America Save for its Old Age? Population Aging, National Saving, and Fiscal Policy (November 1999). Available at SSRN: https://ssrn.com/abstract=220029 or http://dx.doi.org/10.2139/ssrn.220029

Douglas W. Elmendorf

Harvard Kennedy School ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Louise Sheiner (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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