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

Abstract

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 worldwide 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.

Global Demographic Change and Climate Policies

“…Demography also drives part of international trade and capital flows, which reflect discrepancies between savings and investments across countries (Backus et al, 2014;Fedotenkov et al, 2014;Krueger and Ludwig, 2007). Demographic change has been connected to housing prices, since lower returns to capital in the future create incentives for seeking alternative stores of value (Chen and Wen, 2017), and changes in social security systems due to population aging (Imrohoroglu and Zhao, 2017;Cipriani, 2014;Fanti and Gori, 2012).…”

Optimal pensions in aging economies

“…In particular, the two-state Markov chain is calibrated so that the annual persistence amounts to 0.98 with an implied conditional variance of 8%. Accordingly, {η 1 , η 2 } = {0.727, 1.273} and Our modeling of individual productivity is in accordance with the large-scale OLG models of Storesletten, Telmer, and Yaron (2004), Conesa and Krueger (1999), and Krueger and Ludwig (2007). We acknowledge that our specification of the individual productivity process and, hence, the labor earnings is rather parsimonious and a simplification with respect to recent empirical evidence.…”

Political Preferences and the Aging of Populations

“…Other studies, looking at OECD countries in general, report somewhat larger adverse effects on aggregate productivity growth (see Krueger and Ludwig (2007);Werding (2008)). …”