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Global Aging and Declining World Interest Rates

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Author Info

  • Alexander W. Hoffmaister
  • Jaime Guajardo
  • Mario Catalán

Abstract

How will the world-wide decline in real interest rates associated with global aging affect small open economies (SOEs) with aging populations? Lower interest rates will result in higher capital-labor ratios and increased wages; higher wages, in turn, will be passed on to pension benefits, exacerbating aging-related fiscal pressures. The pass-through effect will be stronger if pensions are indexed to nominal wages rather than prices. Using an overlapping generations model, the paper illustrates the interest rates transmission mechanism and its interaction with pension indexation for the case of Cyprus. In addition, the paper evaluates the capacity of pension reforms to insure the economy against long-run movements in world interest rates. It concludes that pension reforms, particularly those that change the indexation of pensions from wages to prices, provide substantial macro-insurance and shock absorption benefits.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/98.

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Length: 40
Date of creation: 01 Apr 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/98

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Related research

Keywords: Interest rates; Economic models; pension; benefits; pension benefits; retirement; pensions; wages; pension expenditure; wage; retirement age; pension reforms; pension reform; tax rates; life expectancy; public pensions; tax rate; basic pension; labor force; health care; supplementary pension; pension system; dependency ratio; pension expenditures; payroll; pension benefit; salaries; private pension; labor income; wage rate; replacement rate; private pensions; public pension; aging population; basic pensions; mandatory retirement; private pension benefits; payroll tax; nominal wages; benefit indexation; value of pension; wage rates; net return; long-term care; aging populations; life expectancies; retirement periods; retirement period; nominal wage; pay-as-you-go system; investment returns; basic benefits; net wage; future pension; benefit formulas; pension scheme; individual pension; contribution rates; gross wage; pension contributions; wage growth; old-age pension; public pension expenditures; supplementary pensions;

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References

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  1. Laurence J. Kotlikoff, 1998. "The A-K Model: It's Past, Present, and Future," NBER Working Papers 6684, National Bureau of Economic Research, Inc.
  2. Alexander Ludwig & Dirk Krüger, 2006. "On the Consequences of Demographic Change for Rates of Returns to Capital, and the Distribution of Wealth and Welfare," MEA discussion paper series 06103, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  3. Alexander W. Hoffmaister & Mario Catalan & Jaime Guajardo, 2007. "Addressing the Macroeconomic Consequences of Aging in Cyprus: The Case for Pension Reform," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 1(1), pages 3-25, June.
  4. Stéphanie Guichard & Willi Leibfritz, 2006. "The Fiscal Challenge in Portugal," OECD Economics Department Working Papers 489, OECD Publishing.
  5. David N. Weil, 2006. "Population Ageing," Working Papers id:506, eSocialSciences.
  6. Hoffmaister, Alexander W. & Roldos, Jorge E., 2001. "The Sources of Macroeconomic Fluctuations in Developing Countries: Brazil and Korea," Journal of Macroeconomics, Elsevier, vol. 23(2), pages 213-239, April.
  7. Domeij, David & Flodén, Martin, 2004. "Population Ageing and International Capital Flows," CEPR Discussion Papers 4644, C.E.P.R. Discussion Papers.
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