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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
12140.
Length: Date of creation: Apr 2006 Date of revision: Handle: RePEc:nbr:nberwo:12140
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Find related papers by JEL classification: E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends and Forecasts
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Michele Boldrin & Maria Cristina De Nardi & Larry E. Jones, 2005.
"Fertility and Social Security,"
Levine's Bibliography
666156000000000506, UCLA Department of Economics.
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Other versions:
Michele Boldrin & Mariacristina De Nardi & Larry E. Jones, 2005.
"Fertility and Social Security,"
NBER Working Papers
11146, National Bureau of Economic Research, Inc.
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Michele Boldrin & Mariacristina De Nardi & Larry E. Jones, 2005.
"Fertility and Social Security,"
Staff Report
359, Federal Reserve Bank of Minneapolis.
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Dominik Grafenhofer & Christian Jaag & Christian Keuschnigg & Mirela Keuschnigg, 2006.
"Probabilistic Aging,"
CESifo Working Paper Series
CESifo Working Paper No. , CESifo Group Munich.
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