International Diversification of Pension Assets Is No Panacea for Population Aging

Six years ago,\f2The Economist\f1 wrote that investing retirement savings in developed countries in the emerging markets of still-youthful developing countries promised to "beat demography." As labor force growth slows in the North, runs this argument, capital becomes abundant relative to labor and the rate of return to this capital declines. By investing in the South, not only do OECD investors earn a higher rate of return on their savings, but the rate of return to that capital which remains in the North is boosted as well, because there is less of it. Working with a two-region neoclassical economic-demographic model, the authors show that reallocating capital from North to South can, at most, only slightly attenuate the negative macroeconomic impacts of population aging. Moreover, the reallocaion gives rise to significant, and thus politically challenging, shifts in the distribution of income between working- and retirement-age populations in both regions.