Keywords: Aging, saving
Abstract: While popular wisdom holds that the United States should save more now
in anticipation of the aging of the baby boom generation, the optimal response
to population aging from a macroeconomic perspective is not clear-cut.
Indeed, Cutler, Poterba, Sheiner, and Summers ("CPSS",1990) argued that the
optimal response to the coming demographic transition was more likely to be
a reduction in national saving than an increase. In this paper we reexamine
this question. In particular, we ask how the optimal saving response depends
on the openness of our economy, on how we view the consumption of children,
and on the existence of pay-as-you-go transfer programs like Social Security
We find that, if the United States were a small open economy and world
interest rates were fixed at their current level, the desire to smooth
consumption as our population aged would lead us to increase saving today.
But the optimal response in a closed economy is much less clear-cut, as
slower growth of the labor force will push down the rate of return on capita
l and diminish desired saving. For reasonable parameters, the optimal
response to our aging population in a closed economy is likely to be small--either a small decline in national saving or a small increase. We also
explore the role of the government in population aging. Government programs
can influence consumption if they affect the capital-labor ratio or the
relative weight that society places on the consumption of the elderly.
Full paper (186 KB PDF)
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Last update: August 11, 2000