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Ageing, government budgets, retirement, and growth

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  • Gonzalez-Eiras, Martín
  • Niepelt, Dirk

Abstract

We analyze the short and long-run effects of demographic ageing – increased longevity and reduced fertility – on per-capita growth. The OLG model captures direct effects, working through adjustments in the savings rate, labor supply, and capital deepening, and indirect effects, working through changes of taxes, government spending components and the retirement age in politico-economic equilibrium. Growth is driven by capital accumulation and productivity increases fueled by public investment. The closed-form solutions of the model predict taxation and the retirement age in OECD economies to increase in response to demographic ageing and per-capita growth to accelerate. If the retirement age was held constant, the growth rate in politico-economic equilibrium would essentially remain unchanged, due to a surge of social-security transfers and crowding out of public investment.

Suggested Citation

  • Gonzalez-Eiras, Martín & Niepelt, Dirk, 2012. "Ageing, government budgets, retirement, and growth," European Economic Review, Elsevier, vol. 56(1), pages 97-115.
    • Handle: RePEc:eee:eecrev:v:56:y:2012:i:1:p:97-115
    DOI: 10.1016/j.euroecorev.2011.05.007
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    More about this item

    Keywords

    Ageing; Government budgets; Retirement; Growth;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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