Verbič & Spruk: Aging Population and Public Pensions – Theory and Macroeconometric Evidence

Summary: Rapidly aging population in high-income countries has exerted additional pressure on the sustainability of public pension expenditure. We present a theoretical model of public pension expenditure under endogenous human capital, where the latter facilitates a substantial decrease in equilibrium fertility rate alongside the improvement in life expectancy. We demonstrate how higher life expectancy and human capital endowment facilitate a rise of net replacement rate. We then provide and examine an empirical model of old-age  expenditure in a panel of 33 countries for the period 1998-2008. Our results  indicate that increases in effective retirement age and total fertility rate would reduce age-related expenditure substantially. While higher net replacement rate would alleviate the risk of old-age poverty, further increases would add  considerable pressure on the fiscal sustainability of public pensions.

 

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