Published online by Cambridge University Press: 28 September 2016
Economic and social impacts of aging trends will be of the utmost importance in the near future. We embed a stylized pay-as-you-go (PAYG) pension system into a DSGE model with overlapping generations to assess the macroeconomic effects of aging in a small Euro Area economy. The simulations suggest large negative impacts on GDP and private consumption. In addition, external imbalances may widen significantly under the PAYG system. All results are conditional on the policy options addressing debt sustainability–the impacts tend to be very large if the government finances the aging with higher social security premia instead of lower replacement ratios. Sensitivity analysis reveals that GDP and private consumption impacts are less robust than those on external imbalances. Results also imply that supranational policy coordination may be crucial if the objective is to preserve economic and financial stability in the Euro Area.
We would like to thank Lara Wemans and all participants in the “Debt and Growth” team, established in the context of the ECB Working Group on Econometric Modelling, for insightful comments and suggestions. The opinions expressed in the article are those of the authors and do not necessarily coincide with those of the Banco de Portugal or the Eurosystem. Any errors and mistakes are ours.