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ECONOMIC-DEMOGRAPHIC DEPENDENCY RATIO IN A LIFE-CYCLE MODEL

Published online by Cambridge University Press:  26 February 2019

Sau-Him P. Lau  and
Albert K. Tsui
Sau-Him P. Lau*
Affiliation:
University of Hong Kong
Albert K. Tsui
Affiliation:
National University of Singapore
*
Address correspondence to: Sau-Him P. Lau, Faculty of Business and Economics, University of Hong Kong, Hong Kong. e-mail: laushp@hku.hk. Phone: (852) 2857-8509. Fax: (852) 2548-1152.
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Abstract

The conventional dependency ratio based on cohort-invariant cutoff points could overstate the true burden of population aging. Using optimal cohort-varying years of schooling and retirement age in a life-cycle model, we propose a modified definition of dependency ratio. We compare the proposed economic-demographic dependency ratio (EDDR) with the conventional definition and find that the conventional dependency ratio of the USA is projected to increase by 0.105 from 2010 to 2060, which is an over-projection of 86% when compared with the projected increase of 0.015 in the EDDR over the same period. Sensitivity analysis suggests that our finding is quite robust to reasonable changes in parameter values (except for one parameter), and the magnitude of over-projection ranges mainly from 0.079 to 0.102 (i.e., 75% to 97%). We follow the well-established Lee–Carter model to forecast stochastic mortality and employ the method of expanding duration to decompose the sources of over-projection.

Keywords

Rapid Population AgingBehavioral ResponseEconomic-Demographic Dependency RatioConventional Dependency Ratio
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Issue 7 , October 2020 , pp. 1635 - 1673
Copyright
© Cambridge University Press 2019

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Footnotes

We thank the University of Hong Kong (Project No. 104003954) for financial support. We are grateful to Kelvin Yuen for valuable research assistance, and to an anonymous referee and the participants of the Asian Meeting of the Econometric Society (Hong Kong), Annual Conference of the European Society for Population Economics (Glasgow) and 25th Annual Colloquium of Superannuation Researchers (Sydney) for useful comments.

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