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This paper develops a model with overlapping generations of households, productive public and private capital, and a golden rule of fiscal policy aimed at maximizing economic growth. Studying the transitional dynamics between steady states triggered by different exogenous shocks, we find that a waning fertility rate, coming through a weaker preference for having children, increased longevity, a decrease in subjective discounting or lower financial support for child rearing, will require a policy intervention to ensure convergence to the growth maximizing debt level. A simple calibration exercise shows that when faced with projected demographic aging the adjustments in public debt and public investment required for keeping the economy at its maximum steady state growth rate may be small.

This paper utilises a model with overlapping generations ad modum Blanchard-Yaari and shows that by broadening the labour supply on the extensive margin through longevity adjustment of the statutory retirement age, labour supply is likely to decrease on the intensive margin. This backlash effect depends strongly on the specific design of the pension system: It is significantly higher under a pay-as-you-go scheme with fixed benefits compared to a pay-as-you-go scheme with fixed contributions and a fully funded scheme based on voluntary savings. The findings have implications for how to address the fiscal and macroeconomic challenges raised by an ageing population. JEL codes: E21, J21, J26, H55