Aging population and public pensions: theory and evidence

Verbič, Miroslav and Spruk, Rok (2011): Aging population and public pensions: theory and evidence.

Abstract

Rapidly aging population in high-income countries has exerted additional pressure on the sustainability of public pension expenditure. We present a formal 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 the rise of net replacement rate. We provide and examine an empirical model of old-age expenditure in a panel of 33 countries in the period 1998–2008. Our results indicate that increases in total fertility rate and effective retirement age would reduce age-related expenditure substantially. While higher net replacement rate would alleviate the risk of old-age poverty, it would endanger long-term sustainability of public finance by imposing additional pressure on deficit and public debt.

• Item Type: MPRA Paper
• Language: English
• Keywords: public pensions; aging; social security; replacement rate; life expectancy
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; H - Public Economics > H5 - National Government Expenditures and Related Policies > H55 - Social Security and Public Pensions; J - Labor and Demographic Economics > J1 - Demographic Economics > J11 - Demographic Trends, Macroeconomic Effects, and Forecasts

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