The Dynamics of the Age Structure, Dependency, and Consumption

Heinrich Hock () and David Weil ()

No 12140, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine the dynamic interaction of the population age structure, economic dependency, and fertility, paying particular attention to the role of intergenerational transfers. In the short run, a reduction in fertility produces a %u201Cdemographic dividend%u201D that allows for higher consumption. In the long run, however, higher old-age dependency can more than offset this effect. To analyze these dynamics we develop a highly tractable continuous-time overlapping generations model in which population is divided into three groups (young, working age, and old) and transitions between groups take place in a probabilistic fashion. We show that most highly developed countries have fertility below the rate that maximizes steady state consumption. Further, the dependency-minimizing response to increased longevity is to raise fertility. In the face of the high taxes required to support transfers to a growing aged population, we demonstrate that the actual response of fertility will likely be exactly the opposite, leading to increased population aging.

JEL-codes: E10 E21 H55 J11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-pbe
Date: 2006-04
Note: AG PE
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Working Paper: The Dynamics of the Age Structure, Dependency, and Consumption (2006)
Working Paper: The Dynamics of the Age Structure, Dependency, and Consumption (2006)
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