The Challenges of an Ageing Population for Savings, Capital Markets,

Productivity and Growth

Juan J. Dolado (ECO, EUI)http://dolado.blogspot.com

EUI Forum Conference on Demography (4-5 February, 2016)

Motivation

Age invaders !! (The Economist April 2014)

Age attacks!!

• “A society of old people, living in old houses, ruminating about old

ideas” (Alfred Sauvy, 1970).

• “We’re going to have a self-centered generation just sucking down

all the resources… [and] may even threaten democracy itself”

(Peterson, 1999).

• “Aging in the US makes our social security and Medicare programs

unsustainable in the long run”(Greenspan, 2003)

Unprecedented rise in 60+ in world pop. (UN)

60+ : 200m (1950) → 760m (2008) → 2 b (2050) (x 10)

80+ : 14m (1950) → 110m (2008) → 400m (2050) (x 30)

…and especially so in developed countries (DC)

Ageing implications

Drivers of ageing & policy implications

Drivers

• Declining fertility rates, especially in LDC.

• Increases in life expectancy , especially in DC

• Past changes in birth and death rates (baby-boom cohorts

becoming 60+) affect Pop. age structure.

Implications

• Older people have different needs and behavior

• Work and save less (↓ labour and ↓ capital)

• Require more healthcare expenditure

• Puts pressure on sustainability of (PAYG) pension systems

Different views

I

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↓

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A simple framework

Received wisdom

• ↑ % older people → ↓productivity growth (skills depreciation) +

↓ savings (S) to maintain living standards + wealth decumulation (asset sales)

S < I ⇒ ↑↑↑↑ real interest rates

↓↓↓↓ asset prices ⇒ Both creditors and debtors lose (Balance-sheet recessions)

⇒ Bailouts and growing debt/GDP

Shrinking working pop. ⇒ ↓ incentives for companies to invest (a

smaller workforce needs less investment) and I < S ( since↓ I and =or

↑ S with China capital outflows)

⇒ Agg. Supply > Agg. Demand (excess capacity)

⇒ ↓↓↓↓ real interest

• S >>>> I + globalization (saving glut) , SBTC (high-tech) & ZLB (deflationary

trap) leads to

Secular stagnation Alvin Hansen- Robert Gordon- Larry Summers (Dr. Dooms)’ key diagnosis:

The record of industrial countries is profoundly discouraging as to the

prospect of maintaining substantial growth with financial stability

Will the EU /US become JAPAN ?

Revisionist view

• Lower working population & ageing reduce sustainability of PAYG

pension systems ⇒ shift of savings to fully-funded systems in a

world of low itnerest rates ⇒ competition for hefty returns

⇒ financial engineering ⇒ ↓ financial stability

(Does this narrative sound familiar as a description of the GR?)

GR Quartet: D. Xiaoping+ E. Blackburn + S. Jobs + G.W. Bush

Counter-arguments

• Yet, many of these gloomy predictions about ageing are based on

accounting effects disregarding behavioural effects: changes in

aggregate outcomes, Y, are assessed assuming fairly constant age-

specific behaviour, y(a), and thus only considering changes in relative

size of different age groups, ωωωω(a)

∆ Y= ∆ [Σ ω(a) y(a)]= Σy(a) ∆ ω(a)+ Σω(a) ∆y(a)

with Σω(a) ∆ y(a) ≅0

...but it is likely that ∆∆∆∆ y(a)≠≠≠≠0

Who is right?

Who is right?

The answer depends on examining the three main channels through

which ageing influences the economy:

(I) changes in the size of the workforce

(II) changes in the rate of productivity growth

(III) changes in the pattern of savings.

(I) Workforce

•Rapid increase in education in DC during XX century ⇒ older workers

postpone retirement to get further returns (↑wages) on their HK

investment…but opposite for less-skilled workers (↓ wages).

• Surge in female LFP participation (in Southern EU, but tapering off

elsewhere) & migration flows from younger LDC to older DC in

exchange for FDI (but anti-migration views due to short-term disruptive

impact)

Compression of morbidity

(II) Productivity growth

• Available evidence: shrinking working-age population dragged

down average annual GDP growth over 2000-14:

Japan (0.6 pp.), Germany (0.5 pp.), US (0.7 pp.)

Key channel: Lack of labour mobility (relocation gains)…

……but this was in part due to asset bubble bursts (JP, US) and short-

run impact of Labour market (GE)

…and a dearth of workers ⇒ new inventions to cope with ageing

(robotics, pharmaceuticals, connectivity) +

…. attributes that enhance productivity in an age of ever-smarter

machines have less to do with pure cognitive speed and more with

accumulated experience + ….better education leads to higher

productivity at any age.

?

(III) Saving patterns and pensions

• Slow advance in adjusting retirement age to life expectancy in the past

↓ ↓ ↑ ↓

• …but also this seems to be changing : % male earnings going to 60-74

cohort has ↑ from 7.3% to 12.7% in US since 2000

• Yet, replacing PAYG with pension capitalization funds might be

dangerous under secular stagnation. Dismantling PAYG may hamper

sustainability of public education systems

(intergenerational pact)

• My advice: Two-armed approach

Dismantling dysfunctional Labor market and Product market

regulations + Investing in (useful) infrastructures & ducation/training

to reduce inequality in opportunities ⇒ ↑employment and improve

productivity growth .

But how under Job Polarization & Older median voter resistance?

Thanks for your attention