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Demographic change, relative factor prices, international capital flows, and their differential effects on the welfare of generations

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  • Börsch-Supan, Axel
  • Krueger, Dirk
  • Ludwig, Alexander

Abstract

Demographic change has differential impacts on the welfare of current and future generations. In a simple closed economy, aging -- a relative scarcity of young workers -- increases wages, increasing the welfare of the young. At the same time, population aging will reduce rates of return to capital, thereby reducing the welfare of asset holders who are usually older than the population average. In a global world with pension systems, however, these effects are less straightforward, since international capital flows dampen the factor price changes. Moreover, pay-as-you-go pension systems financed by payroll taxes create a wedge between net and gross wages, and their intergenerational redistribution has important additional effects on the welfare of generations. To quantify these effects, we develop a large-scale multi-country overlapping generations model with uninsurable labor productivity and mortality risk. Due to the predicted relative abundance of the factor capital, the rate of return falls between 2005 and 2050 by roughly 90 basis points. Our simulations indicate that capital flows from rapidly ageing regions to the rest of the world will initially be substantial, but that trends are reversed when households de-cumulate savings. In terms of welfare, our model suggests that young individuals with little assets and currently low labor productivity indeed gain from higher wages associated with population aging. Older, asset-rich households tend to loose because of the predicted decline in real returns to capital.

Suggested Citation

  • Börsch-Supan, Axel & Krueger, Dirk & Ludwig, Alexander, 2007. "Demographic change, relative factor prices, international capital flows, and their differential effects on the welfare of generations," Papers 07-14, Sonderforschungsbreich 504.
  • Handle: RePEc:mnh:spaper:2553
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    File URL: https://ub-madoc.bib.uni-mannheim.de/2553/1/dp07_14.pdf
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    References listed on IDEAS

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    1. Krueger, Dirk & Ludwig, Alexander, 2007. "On the consequences of demographic change for rates of returns to capital, and the distribution of wealth and welfare," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 49-87, January.
    2. David Altig, 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June.
    3. Axel Börsch-Supan & Alexander Ludwig & Joachim Winter, 2006. "Ageing, Pension Reform and Capital Flows: A Multi-Country Simulation Model," Economica, London School of Economics and Political Science, vol. 73(292), pages 625-658, November.
    4. 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.
    5. Bloom, David E & Williamson, Jeffrey G, 1998. "Demographic Transitions and Economic Miracles in Emerging Asia," World Bank Economic Review, World Bank Group, vol. 12(3), pages 419-455, September.
    6. Axel Boersch-Supan & Alexander Ludwig & Joachim Winter, 2001. "Aging and International Capital Flows," NBER Working Papers 8553, National Bureau of Economic Research, Inc.
    7. Mariacristina De Nardi & Selahattin Imrohoroglu & Thomas J. Sargent, 1999. "Projected U.S. Demographics and Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 575-615, July.
    8. Conesa, Juan Carlos & Krueger, Dirk, 2006. "On the optimal progressivity of the income tax code," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1425-1450, October.
    9. G. M. Grossman & K. Rogoff (ed.), 1995. "Handbook of International Economics," Handbook of International Economics, Elsevier, edition 1, volume 3, number 3.
    10. Alexander Ludwig, 2005. "Moment estimation in Auerbach-Kotlikoff models: How well do they match the data?," MEA discussion paper series 05093, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    11. Robin Brooks, 2003. "Population Aging and Global Capital Flows in a Parallel Universe," IMF Staff Papers, Palgrave Macmillan, vol. 50(2), pages 1-3.
    12. Juan C. Conesa & Dirk Krueger, 1999. "Social Security Reform with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 757-795, October.
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    Cited by:

    1. Steven F. Venti, 2010. "Comment on "Aging Populations, Pension Operations, Potential Economic Disappointment and Its Allocation"," NBER Chapters,in: Demography and the Economy, pages 326-331 National Bureau of Economic Research, Inc.
    2. Alexander Ludwig & Thomas Schelkle & Edgar Vogel, 2012. "Demographic Change, Human Capital and Welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(1), pages 94-107, January.
    3. Cai, Jie & Stoyanov, Andrey, 2016. "Population aging and comparative advantage," Journal of International Economics, Elsevier, vol. 102(C), pages 1-21.
    4. Vistesen, Claus, 2009. "Ageing and Export Dependency," MPRA Paper 17655, University Library of Munich, Germany.
    5. Börsch-Supan Axel & Ludwig Alexander, 2009. "Living Standards in an Aging Germany: The Benefits of Reforms and the Costs of Resistance," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 229(2-3), pages 163-179, April.
    6. Alexander Ludwig & Thomas Schelkle & Edgar Vogel, 2012. "Demographic Change, Human Capital and Welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(1), pages 94-107, January.
    7. Vogel, Edgar & Ludwig, Alexander & Börsch-Supan, Axel, 2011. "Aging and Pension Reform in a Two-Region World: The Role of Human Capital," MEA discussion paper series 11246, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.

    More about this item

    Keywords

    Population Aging ; Relative Factor Prices ; International Capital Flows ; Distribution of Welfare;

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

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