Skip to main content Accessibility help
×
Home

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

  • EDGAR VOGEL (a1), ALEXANDER LUDWIG (a2) and AXEL BÖRSCH-SUPAN (a3)

Abstract

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

Footnotes

Hide All
*

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.

Footnotes

References

Hide All
Altig, D., Auerbach, A. J., Kotlikoff, L. J., Smetters, K. A., and Walliser, J. (2001) Simulating fundamental tax reform in the United States. American Economic Review, 91(3): 574594.
Arrazola, M. and de Hevia, J. (2004) More on the estimation of the human capital depreciation rate. Applied Economic Letters, 11: 145148.
Attanasio, O., Kitao, S., and Violante, G. L. (2007) Global demographic trends and social security reform. Journal of Monetary Economics, 54(1): 144198.
Auerbach, A. J. and Kotlikoff, L. J. (1987) Dynamic Fiscal Policy. Cambridge: Cambridge University Press.
Ben-Porath, Y. (1967) The production of human capital and the life cycle of earnings. Journal of Political Economy, 75(4): 352365.
Börsch-Supan, A., Härtl, K., and Ludwig, A. (2014) Reforms, international diversification, and behavioral reactions. American Economic Review, 104(5): 224229.
Bösch-Supan, A., Ludwig, A., and Winter, J. (2006) Ageing, pension reform and capital flows: a multi-country simulation model. Economica, 73: 625658.
Browning, M., Hansen, L. P., and Heckman, J. J. (1999) Micro data and general equilibrium models. In Taylor, J. B. and Woodford, M. (eds), Handbook of Macroeconomics, Chapter 8. Amsterdam: Elsevier, pp. 543633.
Buiter, W. H. and Kletzer, K. M. (1995) Permanent international productivity growth differentials in an integrated global economy. Scandinavian Journal of Economics, 95(4): 467493.
Buyse, T., Heylen, F., and Van de Kerckhove, R. (2012) Pension reform, employment by age, and long-run growth. Journal of Population Economics, 26(2): 769809.
de la Croix, D. and Licandro, O. (1999) Life expectancy and endogenous growth. Economics Letters, 65: 255263.
de la Croix, D., Pierrard, O., and Sneessens, H. (2013) Aging and pension in general equilibrium: labor market imperfections matter. Journal of Economics Dynamics and Control, 37: 104124.
De Nardi, M., İmrohoroğlu, S., and Sargent, T. J. (1999) Projected U.S. demographics and social security. Review of Economic Dynamics, 2(1): 575615.
Diamond, P. and Gruber, J. (1999) Social security and retirement in the United States. In Gruber, J. and Wise, D. (eds), Social Security and Retirement Around the World, Chapter 11. Chicago: University of Chicago Press, pp. 437474.
Domeij, D. and Flodén, M. (2006) Population aging and international capital flows. International Economic Review, 47(3): 10131032.
Echevarría, C. Á. and Iza, A. (2006) Life expectancy, human capital, social security and growth. Journal of Public Economics, 90: 23242349.
Fehr, H., Jokisch, S., and Kotlikoff, L. J. (2005) Will China eat our lunch or take us out for dinner? Simulating the transition paths of the U.S., EU, Japan, and China. NBER Working Paper No. 11668.
Fehr, H., Kindermann, F., and Kallweit, M. (2013) Should pensions be progressive? European Economic Review, 63: 94116.
Fitzenberger, B., Hujer, R., MaCurdy, T. E., and Schnabel, R. (2001) Testing for uniform wage trends in west-germany: a cohort analysis using quantile regressions for censored data. Empirical Economics, 23: 4186.
Fougère, M. and Mérette, M. (1999) Population ageing and economic growth in seven OECD countries. Economic Modelling, 16: 411427.
French, E. (2005) The effects of health, wealth, and wages on labor supply and retirement behaviour. Review of Economic Studies, 72: 395427.
French, E. and Jones, J. (2012) Public pensions and labor supply over the life cycle. International Tax and Public Finance, 19(2): 268287.
Fuster, L., İmrohoroğlu, A., and İmrohoroğlu, S. (2007) Elimination of social security in a dynastic framework. Review of Economic Studies, 74(1): 113145.
Gourieroux, C., Monfort, A., and Renault, E. (1993) Indirect inference. Journal of Applied Econometrics, 8, S85S118.
Guvenen, F. and Kuruscu, B. (2009) A quantitative analysis of the evolution of the u.s. wage distribution: 1970–2000. NBER Macroeconomics Annual. NBER. forthcoming.
Hall, R. (1988) Intertemporal substitution in consumption. Journal of Political Economy, 96(2): 339357.
Hansen, G. D. (1993) The cyclical and secular behaviour of the labour input: comparing efficiency units and hours worked. Journal of Applied Econometrics, 8(1): 7180.
Hanushek, E. A. and Kimko, D. D. (2000) Schooling, labor-force quality, and the growth of nations. American Economic Review, 90(2): 11841208.
Heckman, J., Lochner, L., and Taber, C. (1998) Explaining rising wage inequality: explorations with a dynamic general equilibrium model of labor earnings with heterogenous agents. Review of Economic Dynamics, 1: 158.
Heijdra, B. and Reijnders, L. S. M. (2012) Human capital accumulation and the macroeconomy in an ageing society. CESifo Working Paper Series 4046.
Heijdra, B. J. and Romp, W. E. (2009 a) Human capital formation and macroeconomic performance in an ageing small open economy. Journal of Economic Dynamics and Control, 33: 725744.
Heijdra, B. J. and Romp, W. E. (2009 b) Retirement, pensions, and ageing. Journal of Public Economics, 93: 586604.
Huang, H., İmrohoroğlu, S., and Sargent, T. J. (1997) Two computations to fund social security. Macroeconomic Dynamics, 1(1): 744.
Huggett, M., Ventura, G., and Yaron, A. (2012) Sources of lifetime inequality. American Economic Review, 101(7): 2923–54.
Hurd, M. and Rohwedder, S. (2011) Trends in labor force participation: how much is due to changes in pensions? Population Ageing, 4: 8196.
İmrohoroğlu, A., İmrohoroğlu, S., and Joines, D. H. (1995) A life cycle analysis of social securtiy. Economic Theory, 6: 83114.
İmrohoroğlu, S. and Kitao, S. (2009) Labor supply elasticity and social security reform. Journal of Public Economics, 93(7–8): 867878.
Krüger, D. and Ludwig, A. (2007) On the consequences of demographic change for rates of returns to capital, and the distribution of wealth and welfare. Journal of Monetary Economics, 54(1): 4987.
Lagakos, D., Moll, B., Porzio, T., and Qian, N. (2012) Experience matters: human capital and development accounting. NBER Working Paper 18602.
Lee, R. D. and Mason, A. (2010) Fertility, human capital, and economic growth over the demographic transition. European Journal of Population, 26(2): 159182.
Liao, P. (2011) Does demographic change matter for growth? European Economic Review, 55(5): 659677.
Ludwig, A. (2007) The Gauss–Seidel–Quasi-Newton method: a hybrid algorithm for solving dynamic economic models. Journal of Economic Dynamics and Control, 31(5): 16101632.
Ludwig, A., Schelkle, T., and Vogel, E. (2007) Demographic change, human capital and endogenous growth. MEA Discussion Paper 151-07.
Ludwig, A., Schelkle, T., and Vogel, E. (2012) Demographic change, human capital and welfare. Review of Economic Dynamics, 15(1): 94107.
Maddison, A. (2003) The World Economy: Historical Statistics. Paris: OECD.
Mastrobuoni, G. (2009) Labor supply effects of the recent social security benefit cuts: empirical estimates using cohort discontinuities. Journal of Public Economics, 93(11–12): 12241233.
Oeppen, J. and Vaupel, J. W. (2002) Broken limits to life expectancy. Science, 296(5570): 10291031.
Palacios, R. and Pallarés-Miralles, M. (2000) International patterns of pension provision. World Bank Social Protection Discussion Paper Series No. 9.
Prskawetz, A. and Fent, T. (2007) Workforce ageing and the substitution of labor: the role of supply and demand of labour in Austria. Metroeconomica, 58(1): 95126.
Sadahiro, A. and Shimasawa, M. (2002) The computable overlapping generations model with endogenous growth mechanism. Economic Modelling, 20: 124.
Smith, A. A. (1993) Estimating nonlinear time-series models using simulated vector autoregressions. Journal of Applied Econometrics, 8: S63S84.
Storesletten, K. (2000) Sustaining fiscal policy through immigration. Journal of Political Economy, 108(2): 300323.
United Nations (2007) World Population Prospects: The 2002 Revision. New York: United Nations Population Division.
Whitehouse, E. R. (2003) The value of pension entitlements: a model of nine oecd countries. OECD Social, Employment and Migration Working Papers No. 9.

Keywords

Type Description Title
PDF
Supplementary materials

Vogel supplementary material
Appendix

 PDF (120 KB)
120 KB

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed