Saving, growth, and age dependency for OECD countries

Using threshold effects we find that as countries experience an increase in old-age dependency rates, countries with lower domestic saving rates, moderate current account deficits, and are more open to trade can actually experience an increase in GDP growth rates. These countries have greater access to capital markets which will allow them to sustain economic growth in light of substantial increases in their old-age dependency rates. Countries with a lower savings rate are able to rely on domestic consumption and more importantly can rely on foreign investment to offset the decline in worker productivity caused by exodus of domestic workers. Although the effects of an increase in the old-age dependency rate on GDP growth rates are smaller for countries with lower saving rates, these countries also have significantly lower growth rates prior to the increase in the old-age dependency rate. We conclude the effects of population ageing for many high saving countries will depend on their desire to reduce saving rates at old-age dependency rates begin to increase. The ability for lower saving countries to maintain stable growth rates hinges on their ability to sustain current account deficits.