IDEAS home Printed from https://ideas.repec.org/p/fip/fedgfe/2000-03.html
   My bibliography  Save this paper

Should America save for its old age? Population aging, national saving, and fiscal policy

Author

Listed:
  • Douglas W. Elmendorf
  • Louise Sheiner

Abstract

While popular wisdom holds that the United States should save more now in anticipation of the aging of the baby boom generation, the optimal response to population aging from a macroeconomic perspective is not clear-cut. Indeed, Cutler, Poterba, Sheiner, and Summers ("CPSS",1990) argued that the optimal response to the coming demographic transition was more likely to be a reduction in national saving than an increase. In this paper we reexamine this question. In particular, we ask how the optimal saving response depends on the openness of our economy, on how we view the consumption of children, and on the existence of pay-as-you-go transfer programs like Social Security and Medicare. We find that, if the United States were a small open economy and world interest rates were fixed at their current level, the desire to smooth consumption as our population aged would lead us to increase saving today. But the optimal response in a closed economy is much less clear-cut, as slower growth of the labor force will push down the rate of return on capita l and diminish desired saving. For reasonable parameters, the optimal response to our aging population in a closed economy is likely to be small--either a small decline in national saving or a small increase. We also explore the role of the government in population aging. Government programs can influence consumption if they affect the capital-labor ratio or the relative weight that society places on the consumption of the elderly.

Suggested Citation

  • Douglas W. Elmendorf & Louise Sheiner, 2000. "Should America save for its old age? Population aging, national saving, and fiscal policy," Finance and Economics Discussion Series 2000-03, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2000-03
    as

    Download full text from publisher

    File URL: http://www.federalreserve.gov/pubs/feds/2000/200003/200003abs.html
    Download Restriction: no

    File URL: http://www.federalreserve.gov/pubs/feds/2000/200003/200003pap.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Ronald Lee & Jonathan Skinner, 1999. "Will Aging Baby Boomers Bust the Federal Budget?," Journal of Economic Perspectives, American Economic Association, vol. 13(1), pages 117-140, Winter.
    2. Elmendorf, Douglas W. & Gregory Mankiw, N., 1999. "Government debt," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 25, pages 1615-1669 Elsevier.
    3. David N. Weil, 1994. "The Saving of the Elderly in Micro and Macro Data," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 55-81.
    4. Sylvester J. Schieber & John B. Shoven, 1994. "The Consequences of Population Aging on Private Pension Fund Saving and Asset Markets," NBER Working Papers 4665, National Bureau of Economic Research, Inc.
    5. Jagadeesh Gokhale & Laurence J. Kotlikoff & John Sabelhaus, 1996. "Understanding the Postwar Decline in U.S. Saving: A Cohort Analysis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 315-407.
    6. James M. Poterba, 1998. "Population Age Structure and Asset Returns: An Empirical Investigation," NBER Working Papers 6774, National Bureau of Economic Research, Inc.
    7. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
    8. Calvo, Guillermo A & Obstfeld, Maurice, 1988. "Optimal Time-Consistent Fiscal Policy with Finite Lifetimes," Econometrica, Econometric Society, vol. 56(2), pages 411-432, March.
    9. David M. Cutler & Louise Sheiner, 1998. "Demographics and Medical Care Spending: Standard and Non-Standard Effects," NBER Working Papers 6866, National Bureau of Economic Research, Inc.
    10. Michael Mussa & Morris Goldstein, 1993. "The integration of world capital markets," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 245-330.
    11. David M. Cutler & James M. Poterba & Louise M. Sheiner & Lawrence H. Summers, 1990. "An Aging Society: Opportunity or Challenge?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1), pages 1-74.
    12. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-926, Sept./Oct.
    13. Mankiw, N. Gregory & Weil, David N., 1989. "The baby boom, the baby bust, and the housing market," Regional Science and Urban Economics, Elsevier, vol. 19(2), pages 235-258, May.
    14. repec:fth:harver:1490 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Carlos Garriga & Juan Carlos Conesa, 2008. "Generational Policy and the Measurement of Tax Incidence," 2008 Meeting Papers 977, Society for Economic Dynamics.
    2. Mehmet Serkan Tosun, 2004. "Population Aging, Labor Mobility, and Economic Growth: Evidence From MENA and the Developed World," Working Papers 0417, Economic Research Forum, revised 08 May 2004.
    3. Louise Sheiner & Daniel E. Sichel & Lawrence Slifman, 2007. "A primer on the macroeconomic implications of population aging," Finance and Economics Discussion Series 2007-01, Board of Governors of the Federal Reserve System (U.S.).
    4. Louise Sheiner & David M. Cutler, 2000. "Generational Aspects of Medicare," American Economic Review, American Economic Association, vol. 90(2), pages 303-307, May.
    5. Heijdra, Ben J. & Ligthart, Jenny E., 2006. "The Macroeconomic Dynamics Of Demographic Shocks," Macroeconomic Dynamics, Cambridge University Press, vol. 10(03), pages 349-370, June.
    6. Ross S. Guest & Ian M. McDonald, 2010. "Other-Regarding Uzawa Preferences And Living Standard Catch-Up," Pacific Economic Review, Wiley Blackwell, vol. 15(1), pages 87-115, February.
    7. repec:aea:jecper:v:31:y:2017:i:3:p:175-94 is not listed on IDEAS
    8. Mehmet S. Tosun, 2016. "Demographic Changes and Fiscal Policy in MENA Countries," Working Papers 1023, Economic Research Forum, revised Jul 2016.
    9. Martin FlodÈn, 2003. "Public Saving and Policy Coordination in Aging Economies," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(3), pages 379-400, September.
    10. Lee, R., 2016. "Macroeconomics, Aging, and Growth," Handbook of the Economics of Population Aging, Elsevier.
    11. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
    12. Guest, Ross S. & McDonald, Ian M., 2007. "Global GDP shares in the 21st century -- An equilibrium approach," Economic Modelling, Elsevier, vol. 24(6), pages 859-877, November.
    13. Campbell, Doug & Weinberg, John A., 2015. "Are We Saving Enough? Households and Retirement," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 99-123.
    14. Douglas W. Elmendorf & Jeffrey B. Liebman, 2000. "Social Security Reform and National Saving in an Era of Budget Surpluses," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2), pages 1-72.
    15. Xiaoxing Liu & Ying Zhang & Lin Fang & Yuanxue Li & Wenqing Pan, 2015. "Reforming China’s Pension Scheme for Urban Workers: Liquidity Gap and Policies’ Effects Forecasting," Sustainability, MDPI, Open Access Journal, vol. 7(8), pages 1-19, August.
    16. Westerhout, Ed, 2018. "Paying for the Ageing Crisis : Who, How and When?," Discussion Paper 2018-001, Tilburg University, Center for Economic Research.
    17. Garry Young, 2002. "The implications of an ageing population for the UK economy," Bank of England working papers 159, Bank of England.
    18. Sebastian Barnes & Garry Young, 2003. "The rise in US household debt: assessing its causes and sustainability," Bank of England working papers 206, Bank of England.

    More about this item

    Keywords

    Fiscal policy ; Social security ; Medicare;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2000-03. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Franz Osorio). General contact details of provider: http://edirc.repec.org/data/frbgvus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.