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Prepared by Andreas Tudyka.
This SIP is based on the cross-country project “Demographic Headwinds to Convergence in Eastern Europe.”
Several studies document a negative impact of a higher dependency ratio on per capita GDP growth in different parts of the world, e.g. Persson (2002) for the US; Bloom, Canning and Malaney (2000) for East Asia; Aiyar and Mody (2013) for India.
We follow a standard Cobb-Douglas production function specification with constant returns to scale, where output per worker (yit) is given by:
The projections assume a balanced growth path in that capital adjusts to maintain a constant capital-output ratio.
The difference between the net-migration and aging scenarios is only 0.3 percentage points as emigration in projected to slow significantly after 2027.
Experienced individuals may supply more labor in response to wage augmenting technological innovations. At the same time, higher income arising from faster aggregate productivity growth may induce older workers to leave the labor force. Hence, the direction of the possible endogeneity bias is unclear (Adler et al 2017).
This coefficient reflects the historical relationship between workforce aging and TFP growth and does therefore preclude any behavioral shifts that may occur in the future. For example, one may consider that the definition of “older workers” has changed over time and will continue to do so. As such, calculating the impact on GDP growth using the current definition of “older workers” may lead to inflated estimates as longer and healthier life spans lead to workers continuing to be productive even at higher ages. Accounting for this upward shift in the definition of ‘older workers” is very difficult however, as the speed of the shift, as well as the coefficient quantifying the strength of the relationship are difficult to predict.
This exercise can also be conducted in a backward-looking fashion. Accordingly, workforce aging has reduced TFP growth by about 0.2 percentage points per year from 1990 to 2017 on average.
In the extreme case of perfect capital mobility, arbitrage in financial markets should equalize interest rates across borders, and demographic factors of each country should not have an impact on domestic interest rates.
In an NDC system, contributions over an unchanged length of working period will have to cover consumption over longer retirement period as life expectancy increases. At the time of retirement, an annuity is calculated by dividing the individual’s account value by a divisor reflecting life expectancy at the date of retirement. An increase in life expectancy therefore reduces the annual benefit such that the net present value of total expected pension benefits is nearly invariant to changes in the cohort’s remaining life expectancy and the individual’s retirement age. Overall, this would lead to continuously falling replacement rates, which seems unrealistic given the resulting impact on old-age poverty.
The calibration is based on the average annual increase of Spain, which was the best performer in the EU in 1995–2016.
The calibration is based on the average speed of increase in senior participation rates for EU countries which did not change the statutory retirement age in 2000–16.
For age cohorts 55–59 and 65–69 no increase is projected, as the current LFPR is already above the EU average of countries with a retirement age of 67.
For female age cohorts 55–59 and 65–69 no increase is projected as the current LFPR is already above the EU average of countries with a retirement age of 67. speed of increase in senior participation rates for a subsample of countries with unchanged statutory retirement age in 2000–16. The average rate of increase is 0.9.