Demographic Change, Saving and Asset Prices: Theory and Evidence

Population ageing and pension reform will have profound effects on international capital markets. First, population ageing alters the time path of aggregate savings within individual countries. Second, this process may be amplifi ed when a pension reform shifts old-age provision towards more pre-funding. Third, while the patterns of population ageing are similar in most countries, timing and initial conditions differ substantially. Hence, to the extent that capital is internationally mobile, population ageing will induce capital fl ows between countries. All three effects infl uence the rate of return to capital and interact with the demand for capital in production as well as the supply of labour. In order to quantify these theoretical effects, the Mannheim Research Institute for the Economics of Aging (MEA) has developed a computational multi-country overlapping generations (OLG) general equilibrium model. We feed this model with detailed long-term demographic projections for seven world regions and compute the time paths of saving, capital fl ows and returns to productive capital as demographic change proceeds. Our simulations indicate that capital fl ows from fast-ageing regions to the rest of the world will initially be substantial but that trends are reversed when households decumulate savings. We also conclude that closed-economy models of pension reform miss quantitatively important effects of international capital mobility. As an alternative, we also present econometric results from a panel of national time series in which saving rates, rates of return and international capital fl ows are 1. This paper rests on work done by several researchers at the Mannheim Research Institute (MEA). The overlapping generations model has been developed by Alexander Ludwig. The econometric work was part of Melanie Lührmann’s dissertation. The work on asset-price meltdowns has been done by Mathias Sommer. Joachim Winter has helped me a great deal in supervising this work. My primary thanks go to these dedicated MEA researchers. We thank Alan Auerbach, Ralph Bryant, Hans Fehr, Alexia Fürnkranz-Prskawetz, Ulrich Grosch, Florian Heiss, Heinz Hermann, Gary Hufbauer, Ulf von Kalkreuth, Florence Legros, Shinichi Nishiyama, Howard Rosen and Tarmo Valkonen for their helpful remarks on this line of research, and Holger Herz and Max Flötotto for their excellent research assistance. We also received helpful feedback at many conferences and seminars. This ongoing project is supported by the VW Foundation, the Deutsche Forschungsgemeinschaft, the Land of Baden Württemberg, the Gesamtverband der deutschen Versicherungswirtschaft, and the US Social Security Administration through grant #10-P-98363-2 to the National Bureau of Economic Research as part of the SSA Retirement Research Consortium. The fi ndings and conclusions expressed are solely those of the author and do not represent the views of SSA, any agency of the US Government, or the NBER. 133 Demographic Change, Saving and Asset Prices: Theory and Evidence related to anticipated demographic change. These estimates support the results from the multi-country OLG model.