TY - JOUR AU - Ludwig,Alexander AU - Krueger,Dirk AU - Boersch-Supan,Axel H. TI - Demographic Change, Relative Factor Prices, International Capital Flows, and Their Differential Effects on the Welfare of Generations JF - National Bureau of Economic Research Working Paper Series VL - No. 13185 PY - 2007 Y2 - June 2007 UR - http://www.nber.org/papers/w13185 L1 - http://www.nber.org/papers/w13185.pdf N1 - Author contact info: Alexander Ludwig CMR Department of Economics and Social Sciences University of Cologne Albertus-Magnus-Platz 50923 Cologne GERMANY E-Mail: ludwig@wiso.uni-koeln.de Dirk Krueger Economics Department University of Pennsylvania 160 McNeil Building 3718 Locust Walk Philadelphia, PA 19104 Tel: 215/898-6691 Fax: 215/573-2057 E-Mail: dkrueger@econ.upenn.edu Axel H. Boersch-Supan Munich Center for the Economics of Aging Max Planck Institute for Social Law and Social Policy Amalienstrasse 33 80779 Munich GERMANY Tel: +49 (89) 3860-2355 Fax: 49 (89) 3860-2390 E-Mail: axel@boersch-supan.de M1 - published as Alexander Ludwig, Dirk Krüger, Axel Börsch-Supan. "Demographic Change, Relative Factor Prices, International Capital Flows, and Their Differential Effects on the Welfare of Generations ," in Jeffrey Brown, Jeffrey Liebman and David A. Wise, editors, "Social Security Policy in a Changing Environment" University of Chicago Press (2009) M3 - presented at "Retirement Research", October 19-22, 2006 AB - Demographic change has differential impacts on the welfare of current and future generations. In a simple closed economy, aging -- a relative scarcity of young workers -- increases wages, increasing the welfare of the young. At the same time, population aging will reduce rates of return to capital, thereby reducing the welfare of asset holders who are usually older than the population average. In a global world with pension systems, however, these effects are less straightforward, since international capital flows dampen the factor price changes. Moreover, pay-as-you-go pension systems financed by payroll taxes create a wedge between net and gross wages, and their intergenerational redistribution has important additional effects on the welfare of generations. To quantify these effects, we develop a large-scale multi-country overlapping generations model with uninsurable labor productivity and mortality risk. Due to the predicted relative abundance of the factor capital, the rate of return falls between 2005 and 2050 by roughly 90 basis points. Our simulations indicate that capital flows from rapidly ageing regions to the rest of the world will initially be substantial, but that trends are reversed when households de-cumulate savings. In terms of welfare, our model suggests that young individuals with little assets and currently low labor productivity indeed gain from higher wages associated with population aging. Older, asset-rich households tend to loose because of the predicted decline in real returns to capital. ER -