Beggar Thy Thrifty Neighbour: The International Spillover Effects of Pensions Under Population Ageing

Abstract

This paper explores the international spillover effects of ageing through capital markets when countries have different pension systems. We use a two-country twoperiod overlapping-generations model, where the two countries only differ in their pension schemes. Two forms of population ageing are considered, namely an increase in longevity and a fall in fertility. It is shown that in the long run a country using a funded pension system experiences negative spillovers from the fact that the other country uses a PAYG system. The short-run spillovers, however, are opposite to the spillovers in the long run.JEL codes: F21, H55, J11

International trade with pensions and demographic shocks

“…In most scenarios in this model, ageing countries export capital in the short run, and start importing capital later. Adema et al (2008) study the spillover effects of pension schemes under symmetric population ageing in a two-country two-OLG model with perfect capital mobility, and show that a country with a PAYG pension scheme gains from the country with a funded pension scheme, because it generates larger savings. Ito and Tabata (2010) also study international spillover effects through cross-border capital flows, but model ageing as an increase in longevity.…”

Optimal Asymmetric Taxation in a Two-Sector Model with Population Ageing

“…For this reason, we have chosen parameter values commonly reported in the literature. The annual discount factor is often chosen to be close to 1% (Börsch-Supan, Ludwig, and Winter 2006;Adema, Meijdam, and Verbon 2008). In our model, as the period is approximately equal to 35 years, the discount factor corresponds to ρ = 0.4166.…”

“…Population size at t = 0 is normalized to unity and population growth n is set to 0.2, this approximately corresponds to 0.5% annual growth of population due to fertility. Longevity ψ here means a survival probability before the next period, and it is presumed to be close to 1 (see Adema et al (2008), for example). We set it at 0.9.…”

Demographic Change, International Trade and Capital Flows

“…Through these international capital flows, developments in one country cause spillover effects on another, especially if the countries' institutions are different. Adema et al (2008), for instance, focus on differences in pension schemes and the spillover effects of demographic changes. In this paper, we show that a relatively smaller labour force does not necessarily imply a relatively smaller capital stock, if one allows for not one but different kinds of commodities and international trade.…”

“…This decrease in the interest rate is especially painful for the old generation which is decumulating their savings, when the pension system has a large funded part. International spillovers of ageing caused by different pension systems were studied by Adema et al (2008). They show that with a symmetric increase in longevity in two countries, the country with a funded pension scheme is in the long run more vulnerable to this shock if its neighbouring country has a PAYG-scheme.…”