Findings

Economic impact of demographic change

The first deliverable for the ‘Economic consequences of ageing’ research field is a report on a multi-country simulation model (PDF, 186KB) which quantifies the economic impact of the demographic transition in the western world and major Asian countries. The model distinguishes seven world regions where each region distinguishes one hundred overlapping generations in three different skill classes. Agents allocate their time endowment to labour supply, training on the job and leisure. Training on the job increased future human capital endowment.

Consequently rising life expectancy increases incentives for investment in human capital which hopefully reduces the fiscal cost of ageing. Households also split their consumption demand into age-specific consumption categories. As a result, the ageing process not only has an impact on human capital formation but also on the level and composition of consumption demand as well as trade balances and trade structures.

Production structures and trade

The second deliverable is a paper on the impact of demographic change on production structures and trade (PDF, 199KB). The paper simulates the impact of the demographic transition in the western world and major Asian countries on production sectors and trade flows in a multi-region simulation model.

The first part concentrates on the difference between exogenous and endogenous human capital formation in a stylised model with a developed and a developing region, showing that rising life expectancy increases incentives for investment in human capital which reduces incentives for savings so that the world interest rate increases. This is followed by disaggregation of the model version with exogenous human capital into five developed regions as well as India and China as developing regions.

The focus is on the impact of the divergent ageing processes on world interest rates and wages but also on the changing production structures as well as trade balances and trade structures. The results indicate that the ongoing specialisation of high-tech goods in the developed world and low-tech goods in the developing world will continue for the next decades.

Probabilistic household forecasts

The third paper is on probabilistic household forecasts for five countries in Europe (PDF, 977KB). This is important as the household structure of the population informs planning in various sectors of society. Social welfare spending depends on the number of lone parents. Elderly persons who live alone are more vulnerable than those who live with a partner, elderly women in particular.

Household status is an important determinant for the need of formal and informal support and care for the elderly, in addition to health. Rising numbers of one-person households in western countries have a strong impact on housing needs. Finally, falling average household size increases the demand for energy, because of economies of scale in energy use in large households.

Starting from household structures known from the 2011 round of Population and Housing Censuses, probabilistic household forecasts have been computed for the five countries for the years 2021, 2031, and 2041. First, probabilistic population forecasts were computed, using Alho’s Scaled Model for Error, and the corresponding simulation program PEP (Program for Error Propagation). The result was a set of simulated probability distributions for the population in each country in these three years broken down by age and sex.

Next, stochastic processes were defined for a set of shares that distribute the population for each combination of sex and age over seven household positions: child, living alone, cohabiting, married, lone parent, other private household position, and living in an institution. Based on analyses for three countries with long data series (Denmark, Finland, and the Netherlands), each share was defined as a Random Walk with Drift (RWD) process.

The age pattern of the shares was preserved by using the Brass Relational Logit model. Future household shares were found by extrapolating the RWD processes. This resulted in household share forecasts, as well as standard errors of the forecasts. Correlations across ages and between men and women were estimated from model residuals.

No time series data were available for Germany or Norway. For Germany, we used household transition rates borrowed from Denmark and Finland, but adjusted to cohabitation and marriage levels from the German Generation and Gender Survey. For Norway, we had household transition rates for the year 2010 from the population register.

Future household patterns for these two countries were computed by using the multistate household model LIPRO, in which the household transition rates are applied to the household pattern from the census. Uncertainty parameters for the shares were borrowed from the time series analyses for Denmark, Finland and the Netherlands.

The results show a continuation of current trends towards more and smaller households, often driven by increasing numbers of persons who live alone. The number of households increases faster than population size, which leads to falling average household size. A very consistent finding is that larger households are easier to predict than smaller households, at least when uncertainty is considered in a relative sense (ie width of prediction interval relative to forecast value).

Full data on these household forecasts

Implications of the demographic transition

Three papers have been produced which combine to provide a comprehensive up-to-date literature review to describe the implications of the demographic transition and some recent policy reactions for the older person and their families, the public finances, the national economies and the EU. In addition, alternative measurements of ageing are explored and the challenges stemming from an ageing Europe is put into perspective.

The three papers (below) deal with various issue around measuring and quantifying the impact of the ageing of European societies.

Barslund, M. and Werder, M. V. (2015) ‘Measuring ageing and the need for longer working lives in the EU’ (PDF, 1MB)

Barslund, M. and Werder, M. V. (2015) ‘Measuring dependency ratios using National Transfer Accounts’ (PDF, 1.2MB)

Lassila, J. (2015) ‘Quantifying the influence of demographic transition on public finances in Finland’ (PDF, 5.7MB)

Impact of measures to promote labour supply on the welfare of older people

This research task explored the incentive effects of taxation and income transfers depend on age, income and wealth. Future older citizens have on average better education, higher healthy life expectancy, bigger pensions and more wealth. These resources allow them to participate to labour, capital, and goods markets as active suppliers of formal and informal work, as providers of savings, as investors to new forms of housing and as demanding consumers of new products. The incentive effects of taxation and transfer rules must be examined and redesigned so that they are beneficial for both the elderly and the society at large.

This task simulated how longer lifetimes and policies aiming to support labour supply promote the welfare of the older citizens, their employment, economic growth and the balance of public finances. It produced two papers:

Määttänen, N. (2015), ‘Report on the impact of measures to promote labour supply on the welfare of older people’ (PDF, 623KB)

Lassila, J. and Valkonen, T. (2015) ‘Longevity risk and taxation of public pensions’, CESifo working paper no. 5640 (PDF, 1.2MB)

Tax policy in a multi-country, multi-sector OLG model

This report on tax policy in a multi-country, multi-sector overlapping generations (OLG) model (PDF, 207KB) simulates the impact of various policies which are aimed to balance the burden of ageing populations more equally among current and future cohorts. It analyses the qualitative and quantitative effects of more consumption taxation, no capital income taxation, debt reduction and pension funding in western economies.

It shows that policies that typically reduce future burdens induce sectoral shifts towards investment and housing sector and increase high-tech goods imports. Countries which are flexibly in producing high-tech goods may therefore benefit from terms of trade effects.

Policy Brief

MoPAct Policy Brief 1 – Economic effects of population ageing (PDF, 755KB)