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On the Consequences of Demographic Change for Rates of Returns to Capital, and the Distribution of Wealth and Welfare

  • Dirk Krueger
  • Alexander Ludwig

This paper employs a multi-country large scale Overlapping Generations model with uninsurable labor productivity and mortality risk to quantify the impact of the demographic transition towards an older population in industrialized countries on world-wide rates of return, international capital flows and the distribution of wealth and welfare in the OECD. We find that for the U.S. as an open economy, rates of return are predicted to decline by 86 basis points between 2005 and 2080 and wages increase by about 4.1%. If the U.S. were a closed economy, rates of return would decline and wages increase by less. This is due to the fact that other regions in the OECD will age even more rapidly; therefore the U.S. is "importing" the more severe demographic transition from the rest of the OECD in the form of larger factor price changes. In terms of welfare, our model suggests that young agents with little assets and currently low labor productivity gain, up to 1% in consumption, from higher wages associated with population aging. Older, asset-rich households tend to lose, because of the predicted decline in real returns to capital.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12453.

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Date of creation: Aug 2006
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:12453
Note: EFG PE
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  1. Axel B�rsch-Supan & Alexander Ludwig & Joachim Winter, 2005. "Aging, Pension Reform, and Capital Flows: A Multi-Country Simulation Model," DNB Working Papers 065, Netherlands Central Bank, Research Department.
  2. 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.
  3. Martin Floden & David Domeij, 2004. "Population Aging and International Capital Flows," 2004 Meeting Papers 490, Society for Economic Dynamics.
  4. Kjetil Storesletten & Chris Telmer & Amir Yaron, 1997. "Consumption and risk sharing over the life cycle," GSIA Working Papers 228, Carnegie Mellon University, Tepper School of Business.
  5. Conesa, Juan Carlos & Krueger, Dirk, 2005. "On the Optimal Progressivity of the Income Tax Code," CEPR Discussion Papers 5040, C.E.P.R. Discussion Papers.
  6. Carroll, Christopher D., 2005. "The method of endogenous gridpoints for solving dynamic stochastic optimization problems," CFS Working Paper Series 2005/18, Center for Financial Studies (CFS).
  7. 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.
  8. David E. Bloom & Jeffrey G. Williamson, 1997. "Demographic Transitions and Economic Miracles in Emerging Asia," NBER Working Papers 6268, National Bureau of Economic Research, Inc.
  9. Hansen, G.D., 1991. "The Cyclical and Secular Behavior of the Labor Input : Comparing Efficiency Units and Hours Worked," Papers 36, California Los Angeles - Applied Econometrics.
  10. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The intertemporal approach to the current account," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 34, pages 1731-1799 Elsevier.
  11. HUANG, HE & IMROHOROG[caron]LU, SELAHATTIN & SARGENT, THOMAS J., 1997. "Two Computations To Fund Social Security," Macroeconomic Dynamics, Cambridge University Press, vol. 1(01), pages 7-44, January.
  12. repec:cup:macdyn:v:1:y:1997:i:1:p:7-44 is not listed on IDEAS
  13. 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.
  14. Ayse Imrohoroglu & Selahattin Imrohoroglu & Douglas H. Joines, 1999. "Social Security in an Overlapping Generations Economy with Land," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 638-665, July.
  15. Martin FlodÈn, 2003. "Public Saving and Policy Coordination in Aging Economies," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(3), pages 379-400, 09.
  16. Michael Feroli, 2003. "Capital flows among the G-7 nations: a demographic perspective," Finance and Economics Discussion Series 2003-54, Board of Governors of the Federal Reserve System (U.S.).
  17. Attanasio, Orazio & Kitao, Sagiri & Violante, Giovanni L., 2007. "Global demographic trends and social security reform," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 144-198, January.
  18. Hans Fehr & Sabine Jokisch & Larry Kotlikoff, 2003. "The Developed World's Demographic Transition - the Roles of Capital Flows, Immigration, and Policy," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-133, Boston University - Department of Economics.
  19. 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.
  20. Attanasio Orazio P. & Kitao Sagiri & Violante Giovanni L., 2006. "Quantifying the Effects of the Demographic Transition in Developing Economies," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-44, April.
  21. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September.
  22. David Altig, 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June.
  23. Robin Brooks, 2003. "Population Aging and Global Capital Flows in a Parallel Universe," IMF Staff Papers, Palgrave Macmillan, vol. 50(2), pages 3.
  24. Ludwig, Alexander, 2007. "The Gauss-Seidel-quasi-Newton method: A hybrid algorithm for solving dynamic economic models," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1610-1632, May.
  25. Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer, vol. 6(1), pages 83-114, June.
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