Fertility and PAYG pensions in the overlapping generations model

Abstract

This article analyses how long-run pay-as-you-go public pensions react to a change in fertility in the basic overlapping generations model of neoclassical growth. While it would seem well established both in the academic and political debates that the decline in fertility represents a "demographic time bomb" for the sustainability of public pensions, it is shown that a falling birth rate need not necessarily cause long-run pension benefit to fall.

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). Curtis et al (2015) show that demographic patterns are able to explain over half of the household savings rate fluctuations in China, while Sánchez-Romero (2013) finds that the demographic transition in Taiwan, during the period 8 Notice that in our modelling, demographic variables are exogenous and temperature changes only affect production.…”

“…We consider a two-period OLG model with full depreciation and log utility based on Cipriani (2014) and Fanti and Gori (2012) to analyze the impact of changes in fertility and life-expectancy on savings and, therefore, through the aggregate capital market, the effect of the demographic transition on environmental policies. Time is discrete and runs to infinity.…”

“…How should climate policies adjust in response to global demographic change? Using a stylized overlapping generations model (based on Fanti and Gori (2012); Cipriani (2014)), we analytically and quantitatively analyze the effects of an increase in life-expectancy and a decrease in fertility rates on households' savings, aggregate capital investments, and efficient climate policies. For comparison we also study demography and optimal climate policy in a Ramsey-Cass-Koopmans model (as in Nordhaus (1993)).…”

Aging, Retirement, and Pay-as-You-Go Pensions

“…A number of papers in the literature have in fact concentrated on the sustainability of the pay-as-you-go pension policy. For example, Fanti and Gori (2012) show that a falling birth rate does not necessarily cause a fall of pensions in the steady state in the canonical OLG model with Cobb-Douglas production function and log utility. Cipriani (2014) shows that if longevity is introduced in their model, population aging may adversely affect the pension system in the long run.…”

“…to aging from above. For instance, Cipriani (2014), complementing the results of Fanti and Gori (2012) focus, respectively, on fertility and longevity. However, the first paper assumes wages and interest rates as fixed, which can only be justified in a small open economy, and the second paper assumes that old agent's labour force participation is a zero-one decision.…”