Demographics, Pension Systems and the Saving-Investment Balance

IMF Working Papers, December 7, 2018

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Demographics, Pension Systems and the Saving-Investment Balance

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Bibliographic details

• Authors: Hua Chai, Jun I Kim
• Published: December 7, 2018
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484385876.001

Overview

• Research question: how demographic change affects national saving, global interest rates, and international capital flows, with emphasis on the role of the public pension system.
• Approach: develop a small open economy overlapping generations (OLG) model and extend it to a two-country setting to simulate demographic change and pension reform scenarios.
• Core finding stated: the generosity of the pension system plays an important role in determining the movement of the global interest rate and patterns of international capital flows.

Model and methodology

• Framework: small open economy overlapping generations (OLG) model to trace channels linking demographic variables and pension system generosity to private and public saving behavior.
• Extension: two-country OLG framework used to simulate cross-border effects and international capital flow patterns.
• Analysis focuses on interactions between demographic change and pension-system design parameters.

Key findings

• Pension generosity materially alters saving behavior:
  • More generous public pension systems affect both private saving and public saving decisions (described generically in the paper).
• Global interest rate movements are influenced by pension-system generosity:
  • The paper finds that pension generosity is an important determinant of global interest rate movements (qualitative finding presented).
• International capital flow patterns respond to demographic change conditional on pension design:
  • Simulations in the two-country model illustrate that pension-system generosity shapes the direction and magnitude of international capital flows.

Policy implications and recommendations

• Pension system design matters for macrofinancial outcomes:
  • Policymakers should account for the broader macroeconomic effects of pension generosity, including implications for national saving rates, global interest rates, and international capital flows.
• Pension reform choices have cross-border consequences:
  • Reforms that change public pension generosity can alter international capital allocation and global interest rate dynamics, implying a need for coordination-aware assessment.

Scenarios and simulations (qualitative summary)

• Single-country scenarios: small open economy OLG simulations illustrate channels from demographics and pension generosity to private/public saving.
• Two-country scenarios: simulations show how demographic transitions and pension reforms in one country affect global interest rates and capital flows, mediated by pension-system generosity.

Demographics, Pension Systems and the Saving-Investment Balance — Hua Chai and Jun I Kim, December 7, 2018 (IMF Working Paper No. 2018/265).

Content in this bundle

• Demographics, Pension Systems and the Saving-Investment Balance, WP/18/265, December 2018
  • Demographics, Pension Systems and the Saving-Investment Balance, WP/18/265, December 2018 (Markdown version)
  • Demographics, Pension Systems and the Saving-Investment Balance, WP/18/265, December 2018 (PDF)