This is - I hope - a relatively brief follow-up to my last post on fertility. This is a quick account of a paper - THE IMPACT OF AGEING ON DEMAND, FACTOR MARKETS AND GROWTH, by OECD economists Joaquim Oliveira Martins, Frédéric Gonand, Pablo Antolin, Christine de la Maisonneuve and Kwang-Yeol Yoo which really is mainly interesting for the fact that it is the economic support for the above-mentioned fertility paper.
What really amazes me in all this is that the OECD work seesm to go on as if the IMF didn't exist. There is only really one paper that they seem to mention in the bibliography that is common to the two approaches - Yaari, M. (1965), “Uncertain Lifetime, Life Insurance, and the Theory of Consumer”, Review of Economic Studies, 32(2) - and this is really so old that this fact in itself is curious. Obviously the IMF economists are much further advanced in their work, and I don't understand why the OECD economists don't simply try and stand on their shoulders (or perhaps I do, and that's what worries me).
Be that as it may, I will do my best. The majority of this paper seems to consist of covering already well-known facts about the situation, eg that there is both increased life expectancy and reduced fertility.
One finding they note which is perhaps worthwhile is:
Moving the old-age threshold in line with longevity gains would only affect old-age dependency if aged workers participate in the labour force, are employed and remain in good health. Labour force participation and employability of older workers will be discussed in Section 5. With regard to healthy ageing, the evidence is scattered and points to many unknowns. No clear pattern emerges from the comparison of trends in life expectancy (LE) and disability-free life expectancy (DFLE) based on available cross-country data (Table 2.4). In some countries, there is a balanced increase, in others the DFLE progresses faster than LE and in a few the reverse is observed.
It's interesting that they find no clear pattern, it's also interesting that they don't mention along with the other factors important to the effectivity of moving the old-age threshold "if aged workers maintain the level of aggregate productivity". This, I would have thought is the key question.
On the consumption impact, which is obviously one of the key areas, they note the following:
"Household survey data suggest that total consumption displays a hump-shaped profile across agegroups (Figure 3.1). These profiles are subject to uncertainties and are not equivalent to saying that the consumption profile is hump-shaped over the life cycle, mainly due to the existence of cohort and time effects.8 Nonetheless, they would suggest that the pure consumption-smoothing hypothesis is only partly supported by the micro data."
This is all broadly in line with other findings, including the consumption smoothing, but is subject to the same caveats as I offered in the Bryant case.
On consumption generally they reach this hardly earth shattering conclusion: "With these orders of magnitude, ageing-induced changes in consumption shares are not expected to generate major structural changes in the economy."
Which is fine, but hardly helps us understand what we are already seeing in Germany and Japan.
As far as capital markets goes they use an Overlapping Generations model The specification of the model draws principally on Börsch-Supan, A., F. Heiss, A. Ludwig and J. Winter (2002), “Pension Reform, Capital Markets, and the Rate of Return". This paper will now need looking at. In particular they inform us that to simplify, "each country is viewed as a closed economy and the labour market is exogenous".This is obviously at variance with the Bryant and McKibbin models where the international dimension is paramount.
They then test three reform scenarious against a baseline 'doing nothing' approach. As they inform us:
"In the two reform scenarios, policy changes are implemented from 2005 onwards. After the reform is announced, households revise their optimal saving paths in order to smooth future consumption levels. This implies that before 2005 consumption for each cohort remains equal to its level in the noreform 'rising contribution rate' scenario. The economies return to a stable population level and structure by 2080, when a steady state equilibrium is reached. In this situation, GDP per capita growth is exclusively determined by the (exogenous) growth in total factor productivity (TFP) and capital deepening grows in line with TFP, at 0.45% per annum.17 By contrast, during the demographic transition, the dynamic equilibrium is driven by ageing trends and pension reforms."
Now its not clear how realistic this is in the first place, since it isn't evident where we will find a stable population structure by 2080, but this is so far out it may be beside the point. We need to understand here the difference between stationary and stable population. A stationary population maintains the same numeric level, but it's stucture may change due to below replacement fertility and increasing longevity (setting each other off). A structurally stable population is one which maintains the shape of the pyramid. It is this latter that I am doubting.
This finding anyway many will find re-assuring.
"The results give little support to the so-called "asset meltdown hypothesis", according to which the massive pension withdrawals during the second phase of the ageing process could induce a large decline in asset prices (see Box 2). Other quantitative studies using general equilibrium models also tend to reject this hypothesis. This is because the asset meltdown hypothesis reflects a partial equilibrium view where changes in economic agents’ behaviour spurred by interest rates movements are not taken into account. Also, the hypothesis may also be based on an exclusive focus on the impacts of ageing on savings, ignoring the impacts via labour supply on investment. In a general equilibrium setting, accounting for these mechanisms largely offsets the asset meltdown effect."
This result is broadly similar to the findings of Börsch Supan et al, but again this isn't so surprising, since they use the same model. I'm not sure what weighting they are giving to house prices in private wealth, and what evolution they see for these. I am aslo not clear whether they do not rely excessively on capital deepening, since this has well known diminishing returns induced limits.
Of course none of these studies seem to take into account the existence of a zero-bound downward limit on interest rates. It is OK to speculate that interest rates may rise later, but the stylised fact we are getting from the 'first wave agers' is that savings first go up, and global interest rates come down.
Now they get onto productivity:
"In the most optimistic scenario, assuming a flat productivity profile for old-age workers, the resulting aggregate productivity levels would increase over the next two decades and stabilise thereafter (Figure 5.3). In the other two scenarios, productivity would uniformly decrease. However, in all three scenarios the order of magnitude of the change is small (+/-2.5%) and this level effect would stabilise after a certain time. This result is related to the evolution of the average age of the labour force (Figure 5.4), which is increasing but will stabilise over the next decades if retirement patterns remain unchanged. This explains why, despite contrasting assumptions about individual age-productivity profiles, ageing per se does not have a major impact on the aggregate productivity level. In this context, concerns about the current "greying" of the labour force have to be seen as a rebound from a previous sharp decrease in the average age of the labour force, the "rejuvenating" shock that took place during the 1970s, from which OECD economies are just recovering. In fact, in the 1990s Japan already experienced the average age of the labour force that is projected to occur in Europe and in North America by 2050."
I remain very sceptical of all this. I think the principal think to say is that we really don't know. We don't know the pace of technical change going out into the future, and we don't know how a greying workforce will adapt to that change. The mention of Japan is tendentious, since it highlights the fact that *some* EU countries face relatively benign ageing (UK, France), while others (Germany, Italy, Spain) face a much more severe problem. Germany eg isn't that different from Japan now, while the UK won't be where Germany is now for at least another twenty years.
Before leaving this perhaps its worth mentioning that alot of the attention is given to the impact of PAYGO pension systems. Obviously these complicate matters enormously, and lead coutries like France with much more moderate birthrate issues to have serious sustainability issues at govt finance level. But these are relatively easy to comprehend. So I don't think they are where the main thrust of our effort should be going right now. What we need to be able to do is model the impact of the demographic changes without the incidentals like PAYGO. We are still some way from doing this, and I think it the pressing issue here. Without adequate models we will not be able to orient our assessments at all.
I suppose it goes without saying: I don't think that this paper is a very useful or important contribution to our knowlege bank.
However, having been so critical, I would like to say that the technical annex 2 which outlines the overlapping generations model is precise and clear. Whoever did this bit knew their sausages.
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