The Dynamics of the Age Structure, Dependency, and Consumption

36 Pages Posted: 18 May 2006 Last revised: 4 Sep 2010

See all articles by Heinrich Hock

Heinrich Hock

Mathematica Policy Research

David N. Weil

Brown University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2006

Abstract

We examine the dynamic interaction of the population age structure, economic dependency, and fertility, paying particular attention to the role of intergenerational transfers. In the short run, a reduction in fertility produces a %u201Cdemographic dividend%u201D that allows for higher consumption. In the long run, however, higher old-age dependency can more than offset this effect. To analyze these dynamics we develop a highly tractable continuous-time overlapping generations model in which population is divided into three groups (young, working age, and old) and transitions between groups take place in a probabilistic fashion. We show that most highly developed countries have fertility below the rate that maximizes steady state consumption. Further, the dependency-minimizing response to increased longevity is to raise fertility. In the face of the high taxes required to support transfers to a growing aged population, we demonstrate that the actual response of fertility will likely be exactly the opposite, leading to increased population aging.

Suggested Citation

Hock, Heinrich and Weil, David Nathan, The Dynamics of the Age Structure, Dependency, and Consumption (April 2006). NBER Working Paper No. w12140. Available at SSRN: https://ssrn.com/abstract=896213

Heinrich Hock

Mathematica Policy Research ( email )

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David Nathan Weil (Contact Author)

Brown University - Department of Economics ( email )

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