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Aging population and public pensions: theory and evidence

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  • Verbič, Miroslav
  • Spruk, Rok

Abstract

Rapidly aging population in high-income countries has exerted additional pressure on the sustainability of public pension expenditure. We present a formal model of public pension expenditure under endogenous human capital, where the latter facilitates a substantial decrease in equilibrium fertility rate alongside the improvement in life expectancy. We demonstrate how higher life expectancy and human capital endowment facilitate the rise of net replacement rate. We provide and examine an empirical model of old-age expenditure in a panel of 33 countries in the period 1998–2008. Our results indicate that increases in total fertility rate and effective retirement age would reduce age-related expenditure substantially. While higher net replacement rate would alleviate the risk of old-age poverty, it would endanger long-term sustainability of public finance by imposing additional pressure on deficit and public debt.

Suggested Citation

  • Verbič, Miroslav & Spruk, Rok, 2011. "Aging population and public pensions: theory and evidence," MPRA Paper 38914, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:38914
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    References listed on IDEAS

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    Cited by:

    1. Marius Cristian MILOS, 2012. "Net migration and natural change main factors for decreasing population," Anale. Seria Stiinte Economice. Timisoara, Faculty of Economics, Tibiscus University in Timisoara, vol. 0, pages 310-313, May.
    2. Milos Marius Cristian, 2012. "Demographic Dynamics And Sustainability Of Public Pension Expenditures Within European Union-15 Member States," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 4, pages 171-174, December.
    3. 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.
    4. Marius Cristian MILOS, 2012. "The old age population in the European Union," Anale. Seria Stiinte Economice. Timisoara, Faculty of Economics, Tibiscus University in Timisoara, vol. 0, pages 304-309, May.

    More about this item

    Keywords

    public pensions; aging; social security; replacement rate; life expectancy;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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