The Dynamics of Age Structure, Dependency and Consumption

Heinrich Hock, Florida State University
David N. Weil, Brown University

This paper considers the evolution of the population age structure and consumption, focusing on the relationship between fertility and economic dependency due to intergenerational transfers. We develop a new continuous-time overlapping generations model that captures these dynamics. Authors such as Bloom, Canning and Sevilla (2001) highlight the short-term consumption benefits of reduced youth dependency after a reduction in fertility. However, the quantitative predictions of our model suggest that the fertility rates exhibited by highly-developed nations are so low that they will ultimately lead to an increase in transfers to the elderly that more than offsets this “demographic dividend.” As mortality rates fall among the elderly, an even higher share of income will need to be diverted toward old-age support. We demonstrate that workers respond by further reducing their fertility, leading to an even deeper demographic deficit.