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
DO  - 10.3386/w13185
UR  - http://www.nber.org/papers/w13185
L1  - http://www.nber.org/papers/w13185.pdf
N1  - Author contact info:
Alexander Ludwig
Goethe University Frankfurt
House of Finance
Theodor-W.-Adorno-Platz 3
D-60629 Frankfurt am Main
Tel: +49 (0)69 798-30036
E-Mail: Alexander.ludwig@econ.uni-frankfurt.de

Dirk Krueger
Economics Department
University of Pennsylvania
The Ronald O. Perelman Center
 for Political Science and Economics
133 South 36th Street
Philadelphia, PA 19104
Tel: 215/898-6691
Fax: 215/573-2057
E-Mail: dkrueger@econ.upenn.edu

Axel H. Börsch-Supan
Munich Center for the Economics of Aging
Max Planck Institute
for Social Law and Social Policy
Amalienstrasse 33
80799 Munich
GERMANY
Tel: +49 (89) 3860-2355
Fax: 49 (89) 3860-2390
E-Mail: boersch-supan@mea.mpisoc.mpg.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 R. Brown, Jeffrey B. 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  -