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The Dynamics of the Age Structure, Dependency, and Consumption

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 Brown University, Department of Economics in its series Working Papers with number 2006-08.

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Date of creation: 2006
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Handle: RePEc:bro:econwp:2006-08
Contact details of provider: Postal: Department of Economics, Brown University, Providence, RI 02912

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  1. David N. Weil, 1999. "Population Growth, Dependency, and Consumption," American Economic Review, American Economic Association, vol. 89(2), pages 251-255, May.
  2. Douglas W. Elmendorf & Louise M. Sheiner, 2000. "Should America Save for Its Old Age? Fiscal Policy, Population Aging, and National Saving," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 57-74, Summer.
  3. Galor, Oded & Weil, David N, 1996. "The Gender Gap, Fertility, and Growth," American Economic Review, American Economic Association, vol. 86(3), pages 374-87, June.
  4. Michele Boldrin & Mariacristina De Nardi & Larry E. Jones, 2005. "Fertility and Social Security," Staff Report 359, Federal Reserve Bank of Minneapolis.
  5. Rodrigo Cerda, 2005. "On social security financial crisis," Journal of Population Economics, Springer, vol. 18(3), pages 509-517, 09.
  6. Ronald Lee & Sang-Hyop Lee & Andrew Mason, 2006. "Charting the Economic Life Cycle," NBER Working Papers 12379, National Bureau of Economic Research, Inc.
  7. Kyung-Mook Lim & David N. Weil, 2003. "The Baby Boom and the Stock Market Boom," Working Papers 2003-07, Brown University, Department of Economics.
  8. Mark Gertler, 1997. "Government Debt and Social Security in a Life-Cycle Economy," NBER Working Papers 6000, National Bureau of Economic Research, Inc.
  9. repec:ese:iserwp:2006-23 is not listed on IDEAS
  10. David E. Bloom & David Canning & Jaypee Sevilla, 2001. "Economic Growth and the Demographic Transition," NBER Working Papers 8685, National Bureau of Economic Research, Inc.
  11. 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.
  12. Dominik Grafenhofer & Christian Jaag & Christian Keuschnigg & Mirela Keuschnigg, 2007. "Economic ageing and demographic change," Vienna Yearbook of Population Research, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna, vol. 5(1), pages 133-165.
  13. Andrew Mason & Ronald Lee & An-Chi Tung & Mun-Sim Lai & Tim Miller, 2006. "Population Aging and Intergenerational Transfers: Introducing Age into National Accounts," NBER Working Papers 12770, National Bureau of Economic Research, Inc.
  14. repec:fth:harver:1490 is not listed on IDEAS
  15. Antoine Bommier & Ronald D. Lee, 2003. "Overlapping generations models with realistic demography," Journal of Population Economics, Springer, vol. 16(1), pages 135-160, 02.
  16. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
  17. Cutler, D.M. & Poterba, J.M. & Sheiner, L.M. & Summers, L.H., 1990. "An Aging Society: Opportunity Or Challenge," Working papers 553, Massachusetts Institute of Technology (MIT), Department of Economics.
  18. Alicia Adsera, 2005. "Vanishing Children: From High Unemployment to Low Fertility in Developed Countries," American Economic Review, American Economic Association, vol. 95(2), pages 189-193, May.
  19. Berthold U. Wigger, 1999. "Pay-as-you-go financed public pensions in a model of endogenous growth and fertility," Journal of Population Economics, Springer, vol. 12(4), pages 625-640.
  20. Cigno, Alessandro, 1992. "Children and Pensions," Journal of Population Economics, Springer, vol. 5(3), pages 175-83, August.
  21. Zhang, Jie, 1995. "Social security and endogenous growth," Journal of Public Economics, Elsevier, vol. 58(2), pages 185-213, October.
  22. Ronald D. Lee & Ryan D. Edwards, 2001. "The fiscal impact of population change," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 46.
  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. 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.
  25. Dominik Grafenhofer & Christian Jaag & Christian Keuschnigg & Mirela Keuschnigg, 2006. "Probabilistic Aging," CESifo Working Paper Series 1680, CESifo Group Munich.
  26. Almudena Sevilla-Sanz & Joost de Laat, 2007. "Working Women, Men`s Home Time and Lowest Low Fertility," Economics Series Working Papers 308, University of Oxford, Department of Economics.
  27. 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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