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The Coming Generational Storm

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  • Laurence J. Kotlikoff, Kent Smetters, and Jan Walliser

Abstract

This paper extends the Auerbach-Kotlikoff life-cycle simulation model by incorporating demographic change, including lifespan extension, and multiple earnings groups within each cohort. The model is used to study the U.S. demographic transition. To ensure a realistic pattern of fertility by age, the model assumes that each agent gives birth to fractions of children during his child-bearing ages. The new model can also initiate transitions from arbitary initial conditions. The baseline simulation, which assumes a continuation of social security pay-as-you-go finance, exhibits sharp increases over time in the payroll tax rate. This increase siphons away so much saving that capital shallowing, rather than capital deepening, occurs over time. Hence, general equilibrium feedback effects exacerbate, rather than mitigate, the problems arising from population aging. The paper also simulates a range of policy reforms, including privatizing social security with different finance mechanisms. The simulations indicate that, compared with a continuation of current policy, privating social security would generate very major long-run welfare gains, particularly for the poorest members of society.

Suggested Citation

  • Laurence J. Kotlikoff, Kent Smetters, and Jan Walliser, 2001. "The Coming Generational Storm," Computing in Economics and Finance 2001 276, Society for Computational Economics.
  • Handle: RePEc:sce:scecf1:276
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    Cited by:

    1. James M. Poterba, 2004. "The impact of population aging on financial markets," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 163-216.
    2. Troy Davig & Eric M. Leeper, 2007. "Generalizing the Taylor Principle," American Economic Review, American Economic Association, vol. 97(3), pages 607-635, June.
    3. Zamac, Jovan & Hallberg, Daniel & Lindh, Thomas, 2008. "Low fertility and long run growth in an economy with a large public sector," CAFO Working Papers 2009:5, Linnaeus University, Centre for Labour Market Policy Research (CAFO), School of Business and Economics.
    4. Warren C. Sanderson & Sergei Scherbov, 2007. "A new perspective on population aging," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 16(2), pages 27-58, January.
    5. Holmøy, Erling & Strøm, Birger, 2013. "Computable General Equilibrium Assessments of Fiscal Sustainability in Norway," Handbook of Computable General Equilibrium Modeling, Elsevier.

    More about this item

    Keywords

    aging; demographics; social security;

    JEL classification:

    • H4 - Public Economics - - Publicly Provided Goods

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