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On the dynamics of the age structure, dependency, and consumption

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  • Heinrich Hock
  • David Weil

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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.

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Bibliographic Info

Article provided by Springer in its journal Journal of Population Economics.

Volume (Year): 25 (2012)
Issue (Month): 3 (July)
Pages: 1019-1043

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Handle: RePEc:spr:jopoec:v:25:y:2012:i:3:p:1019-1043

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Related research

Keywords: Aging; Consumption; Intergenerational transfers; E21; H55; J13;

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  1. Ronald D. Lee & Ryan D. Edwards, 2001. "The fiscal impact of population change," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
  2. Oded Galor & David N. Weil, 1993. "The Gender Gap, Fertility, and Growth," NBER Working Papers 4550, National Bureau of Economic Research, Inc.
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  9. Andrew B. Abel, 2003. "The Effects of a Baby Boom on Stock Prices and Capital Accumulation in the Presence of Social Security," Econometrica, Econometric Society, vol. 71(2), pages 551-578, March.
  10. van Groezen, Bas & Leers, Theo & Meijdam, Lex, 2003. "Social security and endogenous fertility: pensions and child allowances as siamese twins," Journal of Public Economics, Elsevier, vol. 87(2), pages 233-251, February.
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  17. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
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  20. David E. Bloom & David Canning & Jaypee Sevilla, 2001. "Economic Growth and the Demographic Transition," NBER Working Papers 8685, National Bureau of Economic Research, Inc.
  21. repec:fth:harver:1490 is not listed on IDEAS
  22. Rodrigo Cerda, 2005. "On social security financial crisis," Journal of Population Economics, Springer, vol. 18(3), pages 509-517, 09.
  23. Maja B. Micevska & Paul J. Zak, 2002. "What Accounts for the Emergence of Malthusian Fertility in Transition Economies?," Claremont Colleges Working Papers 2002-01, Claremont Colleges.
  24. Zhang, Jie, 1995. "Social security and endogenous growth," Journal of Public Economics, Elsevier, vol. 58(2), pages 185-213, October.
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Citations

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Cited by:
  1. David N. Weil, 2006. "Population Aging," NBER Working Papers 12147, National Bureau of Economic Research, Inc.
  2. Narciso, Alexandre, 2010. "The impact of population ageing on international capital flows," MPRA Paper 26457, University Library of Munich, Germany.

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