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The Dynamics of the Age Structure, Dependency, and Consumption

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Heinrich Hock ()

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Abstract

We examine the dynamic interaction of the population age structure, economic dependency, and fertility, paying particular attention to the role of intergenerational transfers. In the short run, a reduction in fertility produces a “demographic dividend†that allows for higher consumption. In the long run, however, higher old-age dependency can more than offset this effect. To analyze these dynamics we develop a highly tractable continuous-time overlapping generations model in which population is divided into three groups (young, working age, and old) and transitions between groups take place in a probabilistic fashion. We show that most highly developed countries have fertility below the rate that maximizes steady state consumption. Further, the dependency-minimizing response to increased longevity is to raise fertility. In the face of the high taxes required to support transfers to a growing aged population, we demonstrate that the actual response of fertility will likely be exactly the opposite, leading to increased population aging.

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Paper provided by esocialsciences.com in its series Working Papers with number id:505.

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Date of creation: 2006
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Handle: RePEc:ess:wpaper:id:505

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Related research
Keywords: aging; fertility; intergenerational transfers; consumption;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hans-Peter Kohler & Francesco C. Billari & José Antonio Ortega, 2002. "The Emergence of Lowest-Low Fertility in Europe During the 1990s," Population and Development Review, The Population Council, Inc., vol. 28(4), pages 641-680. [Downloadable!] (restricted)
  2. Ronald D. Lee & Ryan D. Edwards, 2001. "The fiscal impact of population change," Conference Series ; [Proceedings], Federal Reserve Bank of Boston. [Downloadable!]
  3. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467. [Downloadable!] (restricted)
  4. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April. [Downloadable!] (restricted)
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  5. Michele Boldrin & Maria Cristina De Nardi & Larry E. Jones, 2005. "Fertility and Social Security," Levine's Bibliography 666156000000000506, UCLA Department of Economics. [Downloadable!]
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  6. Dominik Grafenhofer & Christian Jaag & Christian Keuschnigg & Mirela Keuschnigg, 2005. "Probabilistic Aging," University of St. Gallen Department of Economics working paper series 2005 2005-08, Department of Economics, University of St. Gallen. [Downloadable!]
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  7. Douglas W. Elmendorf & Louise M. Sheiner, 2000. "Should America Save for Its Old Age? Fiscal Policy, Population Aging, and National Saving," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 57-74, Summer. [Downloadable!] (restricted)
  8. Cutler, D.M. & Poterba, J.M. & Sheiner, L.M. & Summers, L.H., 1990. "An Aging Society: Opportunity Or Challenge," Working papers 553, Massachusetts Institute of Technology (MIT), Department of Economics.
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  9. Andrew Mason & Ronald Lee & An-Chi Tung & Mun-Sim Lai & Tim Miller, 2006. "Population Aging and Intergenerational Transfers: Introducing Age into National Accounts," NBER Working Papers 12770, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. David E. Bloom & David Canning & Jaypee Sevilla, 2001. "Economic Growth and the Demographic Transition," NBER Working Papers 8685, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Kyung-Mook Lim & David N. Weil, 2003. "The Baby Boom and the Stock Market Boom," Working Papers 2003-07, Brown University, Department of Economics. [Downloadable!]
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  12. Alicia H. Munnell & Robert E. Hatch & James G. Lee, 2004. "Why is Life Expectancy So Low in the United States?," Issues in Brief ib21, Center for Retirement Research. [Downloadable!]
  13. Andrew B. Abel, 2003. "The Effects of a Baby Boom on Stock Prices and Capital Accumulation in the Presence of Social Security," Econometrica, Econometric Society, vol. 71(2), pages 551-578, March. [Downloadable!] (restricted)
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  14. repec:fth:harver:1490 is not listed on IDEAS
  15. Gertler, Mark, 1999. "Government debt and social security in a life-cycle economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 61-110, June. [Downloadable!] (restricted)
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  16. Maja B. Micevska & Paul J. Zak, 2002. "What Accounts for the Emergence of Malthusian Fertility in Transition Economies?," Claremont Colleges Working Papers 2002-01, Claremont Colleges. [Downloadable!]
  17. Antoine Bommier & Ronald D. Lee, 2003. "Overlapping generations models with realistic demography," Journal of Population Economics, Springer, vol. 16(1), pages 135-160, 02. [Downloadable!] (restricted)
  18. David N. Weil, 1999. "Population Growth, Dependency, and Consumption," American Economic Review, American Economic Association, vol. 89(2), pages 251-255, May. [Downloadable!] (restricted)
  19. Alicia H. Munnell & Robert E. Hatch & James G. Lee, 2004. "Why Is Life Expectancy So Low in the United States?," Issues in Brief ib2004-21, Center for Retirement Research, revised Aug 2004. [Downloadable!]
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  1. David N. Weil, 2006. "Population Ageing," Working Papers id:506, esocialsciences.com. [Downloadable!]
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