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Aging and pension reform: extending the retirement age and human capital formation*

Published online by Cambridge University Press:  08 June 2015

Deutsche Bundesbank, Wilhelm-Epstein-Straße 14, 60431 Frankfurt am Main, Germany (e-mail:
SAFE, Goethe University Frankfurt, House of Finance, Theodor-W.-Adorno-Platz 3, 60629 Frankfurt am Main, Germany
Max Planck Institute for Social Law and Social Policy, Munich Center for the Economics of Aging, Amalienstraße 33, 80799 Munich, Germany


Projected demographic changes in industrialized and developing countries vary in extent and timing but will reduce the share of the population in working age everywhere. Conventional wisdom suggests that this will increase capital intensity with falling rates of return to capital and increasing wages. This decreases welfare for middle aged asset rich households. This paper takes the perspective of the three demographically oldest European nations – France, Germany and Italy – to address three important adjustment channels to dampen these detrimental effects of aging in these countries: investing abroad, endogenous human capital formation, and increasing the retirement age. Our quantitative finding is that endogenous human capital formation in combination with an increase in the retirement age has strong implications for economic aggregates and welfare, in particular in the open economy. These adjustments reduce the maximum welfare losses of demographic change for households alive in 2010 by about 2.2 percentage points in terms of consumption equivalent variation.

Copyright © Cambridge University Press 2015 

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This research was supported by the U.S. Social Security Administration through grant # 5RRC08098400-03-00 to the National Bureau of Economic Research (NBER) as part of the SSA Retirement Research Consortium. The findings and conclusions expressed are solely those of the authors and do not represent the views of the SSA, any agency of the Federal Government, the NBER, or of the Deutsche Bundesbank. Further financial support by the State of Baden-Württemberg, the State of Bavaria, the German Insurers Association (GDV), and the Research Center SAFE, funded by the State of Hessen initiative for research LOEWE is gratefully acknowledged.


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