Aging, Pension Reform, and Capital Flows: A Multi-Country Simulation Model
Population aging and pension reform will have profound effects on international capital markets. First, demographic change alters the time path of aggregate savings within each country. Second, this process may be amplified when a pension reform shifts old-age provision towards more pre-funding. Third, while the patterns of population aging are similar in most countries, timing and initial conditions differ substantially. Hence, to the extent that capital is internationally mobile, population aging will induce capital flows between countries. All three effects influence the rate of return to capital and interact with the demand for capital in production and with labor supply. In order to quantify these effects, we develop a computational general equilibrium model. We feed this multi-country overlapping generations model with detailed long-term demographic projections for seven world regions. Our simulations indicate that capital flows from fastaging regions to the rest of the world will initially be substantial but that trends are reversed when households decumulate savings. We also conclude that closed-economy models of pension reform miss quantitatively important effects of international capital mobility.
We thank Alan Auerbach, Ralph Bryant, Hans Fehr, Alexia Fürnkranz-Prskawetz, Ulrich Grosch, Florian Heiss, Heinz Hermann, Gary Hufbauer, Ulf von Kalkreuth, Florence Legros, Melanie Lührmann, Shinichi Nishiyama, Howard Rosen, Tarmo Valkonen for their helpful remarks on this line of research, and two anonymous referees for their comments, and Holger Herz and Max Flötotto for their excellent research assistance. We also received helpful feedback at many conferences and seminar presentations. This ongoing research project is supported by the VW Foundation, the Deutsche Forschungsgemeinschaft, the Land of Baden Württemberg, the Gesamtverband der deutschen Versicherungswirtschaft, and the US Social Security Administration through grant #10-P98363-2 to the National Bureau of Economic Research as part of the SSA Retirement Research Consortium. The findings and conclusions expressed are solely those of the author(s) and do not represent the views of SSA, any agency of the US Government, or the NBER.