TEL> Vol.2 No.2, May 2012

Implications of an Aging Population on Pension Systems and Financial Markets

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ABSTRACT

In this paper, we introduce a macroeconomic model of overlapping generations to analyze the impacts of the demographic changes as well as the interactions between pension system, bond and stock markets. Furthermore, we examine how the pension system influences the distribution of wealth, consumption and saving within generations. In the context of this model, we show a drastic decline of capital market returns due to an aging population. Moreover, we examine the impacts demographic changes can have on individuals’ welfare for an existing pay-as-you-go pension scheme. Raising the pensionable age combined with a decrease of the contributions seems to be the best policy. On the other hand, increases in contributions as a result of demographic changes show the highest welfare losses. Taken into account the recent pension reforms in Germany, raising the retirement age or a faster transition from a pay-as-you-go pension system to a capital funded one would make sense. But it is questionable whether such a policy will be enforceable with an aging electorate.

Cite this paper

T. Nguyen and R. Stüzle, "Implications of an Aging Population on Pension Systems and Financial Markets," Theoretical Economics Letters, Vol. 2 No. 2, 2012, pp. 141-151. doi: 10.4236/tel.2012.22026.

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