Demographic Change, Savings, and International Capital Flows: Theory and Evidence

David Canning, Harvard University
Rick Mansfield, Yale University
Michael Moore, Queen's University Belfast

Falling mortality and fertility rates, in conjunction with the post-World War II baby boom in developed countries, are generating a period of unprecedented population aging. Since savings rates, labor supply, and worker productivity vary with age, demographic change affects aggregate economic outcomes – via both "accounting" and behavior mechanisms. We build a benchmark theoretical model that generates predictions regarding retirement, aggregate savings, investment, and international capital flows. The model provides a framework for estimating how demographic factors have affected national savings rates and international capital flows. We find that (a) the effect of increased longevity is to increase age at retirement in countries without mandatory retirement and to increase savings in countries with mandatory retirement; (b) pay-as-you-go systems lower aggregate savings; and (c) models that omit longevity and institutional arrangements from the empirical specifications give incorrect estimates of the effect of changes in the age structure on aggregate economic outcomes.