ECONOMIC IMPLICATIONS OF AN AGING POPULATION: THE CASE OF FIVE ASIAN ECONOMIES

Transcription

1 ESRI Discussion Paper Series No.117 ECONOMIC IMPLICATIONS OF AN AGING POPULATION: THE CASE OF FIVE ASIAN ECONOMIES by Manabu SHIMASAWA and Hideoshi HOSOYAMA Sepember 2004 Economic and Social Research Insiue Cabine Office Tokyo, Japan

2 ECONOMIC IMPLICATIONS OF AN AGING POPULATION: THE CASE OF FIVE ASIAN ECONOMIES Manabu SHIMASAWA * Visiing Fellow, Economic and Social Research Insiue, Cabine Office; Akia Keizaihoka Universiy and Hideoshi HOSOYAMA Economic and Social Research Insiue, Cabine Office Sepember, 2004 We would like o hank Hiroko Tada, Yuaka Kosai (Presiden of ESRI), and oher ESRI seminar paricipans for heir helpful commens. The views expressed in his paper are hose of auhors and do no necessarily represen hose of ESRI or of he Japanese governmen. * Corresponding auhor Shimokiae Sakura Morisawa, Akia, Akia, , Japan. el & fax mshimasawa@akeihou-u.ac.jp 1

3 Absrac This paper consrucs a sylized general equilibrium overlapping generaions model in which child-rearing coss are modeled explicily o evaluae quaniaively he effecs of a demographic ransiion in five Asian economies: Japan, China, Korea, Taiwan, and Singapore. The model looks a wo key poins: (i) how boh aggregae variables and iner-generaional welfare are affeced, and (ii) he exen o which he policy reform reduces he negaive effecs i gives rise o. Wih his in mind, we simulae for wo scenarios: a benchmark scenario and a policy change scenario. The simulaion resuls indicae ha populaion aging could have a major impac on savings rae, facor prices, and economic welfare. Especially imporan is he conclusion ha populaion aging will lead o he end of Asia s high economic growh raes. Bu our simulaion resuls also indicae ha policy reform could reduce he negaive effecs. JEL classificaion: C68; E27; H55; J11 Keywords: aging; policy reform; overlapping generaions; Asian economy 2

4 1. Inroducion Due o a reducion in feriliy raes and an increase in life expecancy, many regions of he world are now in he middle of significan demographic ransiions. Though he populaions of mos of he developed counries have been aging for a long ime, Asian counries have jus recenly experienced a dramaic fall in feriliy raes. For example, China has seen a sharp decline in feriliy over he pas hree decades, due o rising incomes and he coercive family planning governmen policies aken in he lae 1970s. Generally speaking, demographic changes have many economic effecs. Bloom and Williamson (1997) calculae ha demographic dynamics beween 1965 and 1990 can explain beween 1.4 percen and 1.9 percen of annual per capia economic growh in Asia, or as much as a hird of is growh miracle. They evaluae he relaive conribuion of labor force and capial inpu o be respecively one hird and wo hirds of he oal demographic impacs. If his is rue, populaion aging in hese economies will lead o sharp declines in economic growh. From he simulaion resuls (by he Auerbach and Kolikoff (1987) ype general equilibrium overlapping generaions model) of some early sudies on he effecs of populaion aging, he balance beween capial and labor will be changed. Labor supply will be scarce whereas capial will be relaively abundan. This will drive up wages relaive o he rae of reurn on capial, reducing household incenives o save (if, of course, he ineres elasiciy of saving is posiive). In addiion, some fracion of he capial sock may become obsolee due o he shrinking labor force and diminishing reurns o scale, making he accumulaion of capial even less aracive. Whereas various economic and social consequences of aging have been invesigaed in advanced counries, very few analyses have explicily been sudied in Asian economies such as China, Korea, and Taiwan. As such, his is, o our knowledge, he firs sudy o employ an overlapping generaions simulaion framework in he conex of populaion aging in Asian economies. In his paper we conribue o he debae on he economic impac of he demographic ransiion in Asian economies in he following way. We rigorously quanify he effec ha demographic changes in general equilibrium have on facor price, oupu, and on he welfare of he various generaions. Moreover, 3

5 we consider he cos of childrearing o quanify he magniude of no only he cos of populaion aging bu also he benefis from he declining birhrae happening in many Asian counries. In doing so, we obain a richer and more robus analysis of he macroeconomic consequences of demographic changes. For his purpose, we use a very sylized overlapping generaions model wih a childrearing cos. To focus on he main poin we wan o sress, we keep he model very simple. In paricular, we do no consider uncerainy inclusive of longeviy. We only have one ype of asse, namely capial sock, as a means of ransferring resources over ime. And we have no moneary variables such as prices. The res of his paper is srucured as follows. Secion 2 presens some facs abou he curren and projeced demographic rends in seleced five Asian economies. In secion 3, we presen a sylized overlapping generaions model ha can be used o evaluae hose effecs quaniaively. In Secion 4, we firs explain how we parameerize and calibrae our model, and hen we presen he benchmark simulaion resuls and a policy change scenario. Secion 5 concludes. 2. Populaion Aging in Five Asian Economies: Some Basic Facs A he beginning of, he world had 6.3 billion people. While he world populaion has consanly grown, is annual growh rae has decreased from 4 percen during he period from 1965 o 1970 o 1.35 percen beween 1995 and I is expeced ha he growh rae is projeced o decrease o 0.33 percen by. By hen, he world s populaion will have increased o 8.9 billion, according o he medium varian of he Unied Naions curren world populaion projecions (Unied Naions ()). The so-called demographic ransiion, characerized by falling moraliy raes followed by a decline in birhraes, leads o populaion aging. Though he paerns of populaion aging are similar in mos counries, is speed differs. The sandou feaure of aging in Asian economies is ha is speed is exremely fas. Le s compare he number of years ha i akes he elderly populaion raio defined as he number of individuals aged 65 and over divided by he enire populaion o increase from 7 percen o 14 percen: 115 years in France, 85 years in Sweden, 40 in Germany, 47 in he U.K. Japan s is jus 24 4

6 years. Oher Asian economies are even more dramaic: 30 years in China, 19 years in Korea, 20 in Singapore, 30 in Thailand, and 27 years in Taiwan, he speed of populaion aging in Korea and Singapore is much faser han ha of Japan s hisorical experience. We now review he dynamics of he populaion srucure of he five Asian economies of Japan, China, Korea, Taiwan, and Singapore. (1) Japan The proporion of people aged under 15, according o he medium varian projecion, is expeced o shrink from he curren 14.6 percen level (2000) o 10.8 percen in. The populaion of he working-age group (aged 15 o 64), according o he medium varian projecion, sared falling in 2000 a 68.1 percen, and is expeced o evenually fall even furher, o 53.6 percen in. The percenage of hose aged 65 and over, 17.4 percen in 2000, will coninue o increase: i will go as high as 35.7 percen in. In Japan, one in 2.8 persons will be over 65 in. The populaion dependency raio is used as an index o express he level of suppor of he working-age group, hrough comparison of he relaive size of child and elderly populaions versus he populaion of he working-age group. The old-age dependency raio (calculaed by dividing he elderly populaion by he populaion of he working-age group) based on he medium varian projecion increases from he curren 26 percen o 67 percen in. In conras, he child dependency raio (calculaed by dividing he child populaion by he populaion of he working-age group) is expeced o undergo a rend from he curren 21 percen o a level of 19 o 21 percen in he fuure. (2) China The proporion of people under age 15, according o he medium varian projecion, is expeced o shrink from he curren 24.8 percen level (2000) down o 16.3 percen in. The populaion of he working-age group (ages 15 o 64), according o he medium varian projecion, sared falling in 2000 a 68.3 percen, and is expeced o drop o 61 percen in. The percenage of hose age 65 and over, 6.9 percen in 2000, will coninue o increase, up o 22.7 percen in. In China, 1 in 4.4 persons will be over 65 in. The populaion dependency raio is used as an index o express he level of suppor for he working-age group, hrough comparison of he relaive 5

7 size of he child and elderly populaions versus he populaion of he working-age group. The old-age dependency raio (calculaed by dividing he elderly populaion by he populaion of he working-age group) based on he medium varian projecion will increase from he curren 10 percen o 37 percen in. In conras, he child dependency raio (calculaed by dividing he child populaion by he populaion of he working-age group) is expeced o drop from he curren 36.4 percen o 26.7 percen in he fuure. (3) Korea The proporion of people under 15, according o he medium varian projecion, is expeced o shrink from he curren 20.8 percen level (2000) down o 16.5 percen in. The populaion of he working-age group (ages 15 o 64), according o he medium varian projecion, sared falling in 2000 a 72.1 percen, and is expeced o drop o 56.1 percen in. The percenage of hose age 65 and over, 7.1 percen in 2000, will coninue o increase, up o 27.4 percen in. In Korea, 1 in 3.6 persons will be over 65 in. The populaion dependency raio is used as an index o express he level of suppor of he working-age group, hrough comparison of he relaive size of he child and elderly populaions versus he populaion of he working-age group. The old-age dependency raio (calculaed by dividing he elderly populaion by he populaion of he working-age group) based on he medium varian projecion, will increase from he curren 9.8 percen o 48.8 percen in. In conras, he child dependency raio (calculaed by dividing he child populaion by he populaion of he working-age group) is expeced o decrease from he curren 28.9 percen o 23 percen around he laer half of s, and up o 29 percen in. (4) Taiwan The proporion of people under 15, according o he medium varian projecion, is expeced o shrink from he curren 21.1 percen (2000) o 13.0 percen in. The populaion of he working-age group (ages 15 o 64), according o he medium varian projecion, sared falling in 2000 a 70.3 percen, and is expeced o drop o 57.3 percen in. The percenage of hose age 65 and over, 8.6 percen in 2000, will coninue o increase, up o 29.8 percen in. In Taiwan, 1 in 3.4 persons will be over 65 in. The populaion dependency raio is used as an index o express he level of 6

8 suppor of he working-age group, hrough comparison of he relaive size of he child and elderly populaions versus he populaion of he working-age group. The old-age dependency raio (calculaed by dividing he elderly populaion by he populaion of he working-age group) based on he medium varian projecion increases from he curren 12.3 percen evenually up o 5 percen in. In conras, he child dependency raio (calculaed by dividing he child populaion by he populaion of he working-age group) is expeced o decrease from he curren 30 percen o 22 percen in he fuure. (5) Singapore The proporion of people under 15, according o he medium varian projecion, is expeced o shrink from he curren 21.9 percen (2000) o 13.9 percen in. The populaion of he working-age group (ages 15 o 64), according o he medium varian projecion, sared falling in 2000 a 70.9 percen, and is expeced o drop o 57.5 percen in. The percenage of hose age 65 and over, 7.2 percen in 2000, will coninue o increase, up o 28.6 percen in. In Singapore, 1 in 3.5 persons will be over 65 in. The populaion dependency raio is used as an index o express he level of suppor of he working-age group, hrough comparison of he relaive size of he child and elderly populaions versus he populaion of he working-age group. The old-age dependency raio (calculaed by dividing he elderly populaion by he populaion of he working-age group) based on he medium varian projecion, will increase from he curren 10.2 percen o 49.8 percen in. In conras, he child dependency raio (calculaed by dividing he child populaion by he populaion of he working-age group) is expeced o drop from he curren 30.8 percen o 24 percen in he fuure. 3. A Sylized Overlapping Generaions Model In his secion, we presen a dynamic, sylized overlapping generaions model ha allows us o analyze he effecs of populaion aging, and he effecs of a shif from a pay-as-you-go sysem o a fully funded pension sysem. The model is based on a version of he overlapping generaions model inroduced by Auerbach and Kolikoff (1987). To invesigae he effecs of populaion aging and a policy reform, general equilibrium models wih overlapping 7

9 generaions have been used, since hey ake ino accoun he ineracion of decisions of households, firms, and he governmen. Since he purpose of his paper is o sudy he macroeconomic effecs of populaion aging and of fundamenal policy reform, we resric he analysis o a very sylized version of he sandard overlapping generaions model ha excludes many ineresing aspecs. The mos significan simplificaions of our model relaive o exising overlapping generaions models are as follows. (i) We do no include labor supply in he household decision problem, bu raher assume ha all households supply one uni of labor unil reiremen inelasically. (ii) We do no model inra-generaional household heerogeneiy and herefore canno capure disribuional effecs. (iii) We assume perfec foresigh. (iv) We do no endogenize human capial and herefore canno accoun for endogenous growh. (v) We model he public pension sysem of each economy in a very simplified way: each is modeled as a pay-as-you-go pension sysem. We believe ha our sylized model is sufficien o obain he firs-order effecs of populaion aging on he economy despie our simplificaions. Concreely, in his secion, we presen he OLG simulaion model, which consiss of four secors: households, firms, governmen, and public pensions. There is a represenaive individual for each generaion in he households secor. Each individual a age 21 maximizes his/her ineremporal uiliy funcion wih consumpion. The represenaive firm maximizes is profis under he producion funcion. The model is a one-counry closed model, where no only he goods marke bu also facor markes are perfecly compeiive. Deails of each secor follow. 3.1 Household Secor The overlapping generaions in our model is based on he life cycle heory of consumpions/savings behavior. We consider an economy in which every person lives for a fixed number of periods. Our model is populaed by households whose inhabians live up o age 80. Consequenly, we disinguish up o 80 generaions wihin each period. The individual life-cycle of a represenaive agen is described in Figure 1. Beween ages 0 and 20 our agens are considered children, who earn no money and who are suppored by heir parens. A age 21 our agens leave heir parens and sar working. Over a given sub-period of heir adul life - beween 25 and 44, aduls are 8

10 supposed o give birh o children, according o a ime disribuion ha ries o mimic he acual ime paern of birhs in each economy. Children are dependen on heir parens unil hey urn 20, wih a cos per child ha is supposed o be proporional o he parens consumpion - funcioning like a consumpion ax - and exogenous 1. Our agens reire a age 64 (44 h period), are graned a pension a age 65 (45 h period), and die a age 80 (60 h period). These are raional, forward-looking agens. His/her uiliy funcion may be specified hus 2 : U i j c i, j = j= ρ 1-γ 1-γ (1) where i refers o he i h generaion, j refers o he j h period of life, ρ is he pure rae of ime preference, and γ is he reverse of he elasiciy of ineremporal subsiuion. The argumens of he uiliy funcion are he consumpion per period (c i,j ). His/her ineremporal budge equaion may be described as follows: re 60 PDV i, j (1- τw - τp )w(1+λ) e j + PDVi, j pi, j j=1 j=re 60 = PDV (1+ τc +τcc )c j=1 i, j i, j i, j (2) cc j = cons. if 5 j 24 cc j =0 if 1 j 4, j 25 (3) where PDV refers o he facor of he presen discouned value, w is he wage rae a ime, e j is he wage profile i a age j, λ measures he rae of echnical progress, τw is he labor income ax rae a ime, τp is he public pension conribuion rae a ime, τc is he consumpion ax rae a ime, re is he reiremen age, and p i,j sands for pension benefi of generaion i a age j. And τcc akes ino accoun he direc and indirec coss of child-rearing a ime. Each generaion maximizes his/her uiliy funcion (Equaion (1)) under a budge consrain (Equaion (2)). 1 By incorporaing he child-rearing cos and he cos of elderly people in a single framework - inegraing he effecs of rising elderly raios and public pension sysem pressures wih falling youh raios and he implicaions for adul suppor of child consumpion - we obain a richer and more robus analysis of he macroeconomic consequences of demographic shifs. 2 The value of key parameers is lised in he Table 1. 9

11 Wih he maximizaion procedure, he following Euler equaions can be solved, concerning consumpion per period. ( ) 1 1 γ γ 1+ r 1- τr 1+τc -1+τcc -1 i, j i, j-1 1+ ρ 1+τc +τcc c = c 60 A C A, j i, j, j=1 C = N c C = τcc C (3) where N,j measures he number of he adul people of age j a period, C A is he aggregaed consumpion of aduls a ime, and C C is he aggregaed consumpion of child a ime. We can also obain he following physical wealh accumulaion equaion wih he maximizaion procedure: { ( )} a =a 1+r 1-τr +(1-τw -τp )w(1+λ) e -(1+τc +τcc )c i,j i,j-1 i, j i,j 60 PA = N a,j i,j j=1 where a i,j is physical wealh asse of generaion i a age j, r is he ineres rae a ime, τr is he ax rae on ineres income a ime, and PA is he aggregaed privae asse a period. (4) 3.2 Firm Behavior The inpu/oupu srucure is represened by he Cobb-Douglas producion funcion wih consan reurn o scale. The firm decides he demand for physical capial (K) and effecive labor (L e ) o maximize is profi wih he given facor prices of wages and ren, which are deermined in perfec compeiive markes. α 1-α Y = AK L e, (5) K = I + ( 1- δ) K -1 (6) ( ) r=αak L -δ, w = 1- α AK L (7) α-1 1-α α -α e, e, where Y is oupu, α sands for capial income share, A is a scale parameer, δ is he depreciaion of physical capial, K is he physical capial sock, and L e is he effecive labor. 3.3 Governmen 10

12 The governmen secor has hree ypes of axes: wage axes, consumpion axes, and capial axes. In our model, we omi public deb for simpliciy and because of lack of daa from Asian economies oher han Japan. I pays consumpion and invesmen as expendiures. Consequenly, he governmen decides ax raes according o emporal budge consrains o balance for each period. The budge consrain in each period is G = T (8) where G sands for governmen expendiure a ime, T denoes ax revenue a ime. 3.4 Public Pension Though he curren public pension sysem of each economy is very diverse, we model i as a pay-as-you go pension sysem for racabiliy. The pension secor grans a pension o he reired generaions while pension conribuions are colleced from he working generaions. re i, j i, j j=1 B= N τpw (1+λ) e (9) where B sands for he aggregaed pension conribuion. The aggregaed pension a ime is given by he produc of he populaion of reiremen age, replacemen rae, and wage. 60 re i, j i, j j=re j=1 P= N β w(1+λ) e (10) where p is he pension, β denoes replacemen rae, re sands for reiremen age, and P is he aggregaed pension benefi. In our model, we calculae he ime pah of he pension conribuion rae (τp) endogenously o keep wihin he budge consrain (11). B=P (11) We do no explicily model he funded componen of he pension sysem. In our model, consequenly, he funded componen consiss enirely of volunary, privae savings. 3.5 Equilibrium Condiion To close he model srucure, he following wo marke-equilibrium condiions mus hold. The firs condiion is equilibrium in he financial marke. K =PA (12) 11

13 The second condiion is he equilibrium in he goods marke. Y=C +C +G+I (13) A C In he model simulaion, privae invesmen (I) is deermined by using his equilibrium condiion. 4. Simulaion Resuls 4.1. Calibraing he Model In his secion, we firs describe he choice of demographics, preferences, producion funcion parameers, fiscal parameers, and pension parameers. For each economy, he parameers are adjused in order so ha simulaed aggregaed variables are realisic. The argeed variable is aggregae savings rae. The benchmark values of he main parameers of he model are presened in Table 1. We now review he choice of parameers. (a) Demographics The model is calibraed wih he demographic projecions esimaed by he UN, as revised in 2002 for Japan, China, Korea, and Singapore unil. For Taiwan, we use he daa esimaed by he Council for Economic Planning and Developmen (CEPD) Manpower Planning Deparmen (2002) unil. We have chosen he medium feriliy scenario. Bu because we also need he evoluion of populaion well afer, birh raes are fixed a replacemen revels afer so ha populaion growh will sabilize in he long run. (b) Preferences For each of he five economies, he ineremporal elasiciy of subsiuion (γ) in he uiliy funcion is se equal o The rae of ime preference (ρ) is chosen such ha he calculaions of he model mach he empirical daa of each economy s aggregae savings rae. (c) Producion Parameers We se he capial income share coefficien equal o This value is based on Japanese daa esimaed by Kao (). The rae of echnical progress is se a 2. We model age-specific labor produciviy by assuming a 12

14 hump-shaped age-earnings profile, i.e., he quadraic equaion used by Miles 2 (1999) ( e =α age-α age ( α,α >0)) 3. The rae of depreciaion of capial sock is 5 percen. age (d) Fiscal Parameers For simpliciy, governmen expendiures o GDP raio are assumed o remain consan a year levels in each economy. In he model, any pressure on he governmen budge consrain is endogenously compensaed by a change in he wage income ax rae o saisfy he governmen emporal budge consrain. The oher ax raes (consumpion and capial income) are se o equal o 5 percen and 20 percen respecively in each economy. These are exogenously consan. (e) Public Pension Parameers As already emphasized, he public pension secor in each economy is reduced o a pay-as-you go pension sysem, wih a permanenly balanced budge. The replacemen rae, i.e., he raio of average pensions o he average ne-of-ax wage earned by he same individuals when employed is se o equal o 50 percen in Japan, and 20 percen in oher economies, which is he same level as China s. In he model, any shocks on he curren pension benefis are endogenously financed by an increase in he conribuion rae. By saring wih acual fiscal, economic, and demographic realiies, he model generaes a much more realisic ime-pah of he variables, including populaion age srucure, elderly dependency raio, and capial deepening. The calibraion resuls are provided in Table Simulaion Analysis We presen esimaes of he macroeconomic effecs of aging, based on he sylized overlapping generaions model wih child-rearing cos described in he previous secion. Firs, we describe he baseline simulaion resuls on he main economic variables, which appear o be appropriae o capure he impacs of aging. We hen presen he resuls of a policy change scenario on hem. Since he model is simulaed over 500 periods, we consider a sufficienly long 3 Each economy s earning profile is repored in Table 2. 13

15 period for a seady-sae o be achieved. We repor our analysis mosly on he period -, which corresponds o he demographic projecion of he UN. The calibraion of dynamic compuable general equilibrium models usually assumes a seady sae for he simulaion saring year. However, since many economies including Japan have been experiencing errible demographic changes up o now, i is very difficul o approximae he economy in in a seady sae. So we begin simulaions from non-seady-sae iniial condiions, which are based on. Therefore, we assume ha he economy in was no in a seady sae, bu was on he ransiion pass o a seady sae in he long run Simulaion Resuls 4 The simulaion resuls describing he macroeconomic impacs of aging are summarized in Figures 2 o 5. We presen he resuls for economic growh rae, wage income ax rae, pension conribuion rae, naional savings rae, ineres rae, and economic welfare measured by discouned lifeime uiliy of individual cohors. Baseline Scenario Firs, we see he change in he populaion srucure in he model. Figures 2 and 3 show he difference beween he child dependency raio and he old age dependency raio calibraed in he model and he one from he original UN projecion. As can be seen from he figures, we succeeded in approximaing he projeced demographic shock. Nex, we see he baseline simulaion resuls. Figures 4(a) o 4(e) give he resuls for each economy. During he demographic ransiion, he effecive wage income ax rae increases o mainain a emporal governmen budge consrain in all economies. The pension conribuion rae also increases sharply, by he range of 50 percen o 100 percen from is level in, o finance increased benefis. Populaion aging pus downward pressure on naional savings under he life cycle hypohesis. As menioned above, he life-cycle heory of 4 Deailed daa of simulaion resuls of each economy are available from he auhor upon reques. 14

16 consumpions/savings behavior is a key assumpion of he model. According o our resuls, he naional savings rae falls beween and in all economies. In Korea, he quie rapid drop in he savings rae reflecs he speed of populaion aging. Aging also leads o a reducion in he growh rae of he labor force and capial sock (due o he reducion of savings rae). However, since he labor force is more negaively affeced by he demographic shock han is he capial sock, he capial deepening progresses; his pus downward pressure on he real reurn o physical capial in all economies by he range of 1.2 basis poins o 3.2 basis poins beween and, and upward pressure on real wage raes. Thus a reducion in he growh raes of he labor force and capial sock leads o a fall in he aggregaed economic growh rae. In China, he growh rae drops dramaically, from 9 percen in 2002 o 3 percen in. As he demographic shock leads o an increase in ax and pension burdens, he economic welfare of individual cohors decreases sharply Policy Change Scenario To sudy he impacs of he policy change agains aging, we simulae a policy change scenario. We assume ha policy change will be execued in. Of course, we chose his year quie arbirarily. The policy change ha we consider is pension reform. We suppose ha he pay-as-you-go public pension sysem will be enirely abolished in. Agens in he model hus rely solely on privae savings o suppor heir lives pos-reiremen. Figures 5 (a) o 5 (e) represen he effec on he main economic variables menioned above in erms of deviaions from he baseline resuls. We, in urn, now see he simulaion resuls. The firs effec of pension reform is o increase he presen value of fuure ne income. This ne increase of i, in urn, has effecs on increased savings rae. Thus increases in physical capial sock caused by he rise in savings make economic growh rae accelerae and rise emporary compared wih he baseline scenario. As far as he ineres rae is concerned, he long-run effec is negaive as physical capial sock increases. Moreover, pension reform reduces he burden and increases ne income. Lifeime uiliy level is improved, hough he welfare of he cohors who are adversely affeced by he reform drops. 15

17 5. Conclusion Aging in Asian economies is expeced o progress dramaically hrough he 21 s cenury. In his paper, we sudy he quesion of wheher 1) aging, and 2) policy reform o cope wih aging will have any quaniaive impac on he Asian economies. We have developed a sylized compuable overlapping generaions model ha explicily incorporaes child-rearing coss. We have hus compued responses o he following wo scenarios: a baseline scenario, in which economic/fiscal/public pension siuaions in are mainained ino he fuure (scenario 1); and a change from he pay-as-you-go pension scheme o a fully funded pension scheme (scenario 2) in using his sylized OLG model. We conclude ha he main resuls of hese scenarios are wofold: (1) aging decreases economic growh raes and lowers economic welfare; and (2) policy change -fundamenal pension reform- re-booss economic growh and improves economic welfare of fuure generaions. From hese resuls, we believe ha i is imporan o manage policy ha pus emphasis on and gives prioriy o he rise of he savings rae o cope wih aging populaion, o avoid he negaive impacs poenially inheren in aging, and o mainain posiive susained growh. References Auerbach, A.J. and L.J. Kolikoff. Dynamic Fiscal Policy. Cambridge Universiy Press: Cambridge, Bouzahzah, M., De la Croix, D., and Frédéric Docquiera. Policy Reforms and Endogenous Growh in Compuable OLG Economies. Journal of Economic Dynamics and Conrol (12): Fougère, M. and M. Méree. Populaion Aging and Economic Growh in Seven OECD Counries. Economic Modelling (3): Kao, R.R. Governmen Defici, Public Invesmen, and Public Capial in he Transiion o an Aging Japan. Journal of he Japanese and Inernaional Economies (4): Lucas, R. E. Jr. On he Mechanics of Economic Developmen. Journal of 16

18 Moneary Economics (1): Naional Insiue of Populaion and Social Securiy Research. Populaion Projecions for Japan, HWS Associaion, Tokyo,. Rebelo, S. Long-Run Policy Analysis and Long-Run Growh. Journal of Poliical Economy (3): Romer, P. Increasing Reurns and Long-Run Growh. Journal of Poliical Economy (5): Romer, P. Endogenous Technological Change. Journal of Poliical Economy. Ocober, (5): Sadahiro, A. and M. Shimasawa. Fiscal Susainabiliy and he Primary Surplus: A Simulaion Analysis wih OLG Model (in Japanese), JCER Economic Journal. July, No. 43: and, The Compuable Overlapping Generaions Model wih an Endogenous Growh Mechanism, Economic Modelling. January,. 20 (1): Solow, R.M. A Conribuion o he Theory of Economic Growh. Quarerly Journal of Economics (1): Swan, T. Economic Growh and Capial Accumulaion. Economic Record (2): Uzawa, H. Opimum Technical Change in an Aggregaive Model of Economic Growh. Inernaional Economic Review (1):

19 Table 1 Values of Key Parameers and Exogenous Variables Japan China Korea Taiwan Singapore Capial income share α Ineremporal elas. of subs. 1/γ Pure rae of ime preference ρ Replacemen raio β Physical capial depreciaion δ Gov. exp. o GDP raio g Consumpion ax rae τc Ineres ax rae τr Rae of echnical progress λ Reiremen age re Table 2 Earning Profiles Japan e age = x age x age 2 China e age = x age x age 2 Korea e age = 83 x age x age 2 Taiwan* e age = 83 x age x age 2 Singapore e age = x age x age 2 Noe: Because we lack daa for Taiwan, we use Korea s wage profile as a subsiue for i. Table 3 Calibraion Resuls Japan China Korea Taiwan Singapore Official Model Official Model Official Model Official Model Official Model Savings rae economic growh rae ineres rae Noe: China s daa is from CY2002. Daa for all oher economies comes from CY. 18

20 Figure 1 The Individual Life-cycle childhood working reiremen /62/65 80 child rearing Figure 2 Youh Dependency Raio (1)Japan % (3)Korea % UN projecion Calibraed (2)China % (4)Taiwan % (5)Singapore % Sources: UN () and auhor s calculaion 19

21 20 Figure 3 Old Age Dependency Raio (1)Japan (2)China (3)Korea (4)Taiwan (5)Singapore UN projecion Calibraed % % % % % Sources: UN () and auhor s calculaions.

22 Figure 4 Benchmark Simulaion Resuls (a) Japan (1)Saving rae (%) (3)Pension conribuion rae(index) = (5)Rae of reurn on capial % (2)Wage income ax rae(index) = (4)Economic growh rae (%) (6)Economic welfare of individual cohors 1960 cohors = cohors

23 Figure 4 Benchmark Simulaion Resuls (b) China (1)Saving rae (%) (3)Pension conribuion rae(index) = (5)Rae of reurn on capial % (2)Wage income ax rae(index) = (4)Economic growh rae (%) (6)Economic welfare of individual cohors 1960 cohors cohors 22

24 Figure 4 Benchmark Simulaion Resuls (c) Korea (1)Saving rae (%) (3)Pension conribuion rae(index) = (5)Rae of reurn on capial % (2)Wage income ax rae(index) = (4)Economic growh rae (%) (6)Economic welfare of individual cohors 1960 cohors cohors 23

25 Figure 4 Benchmark Simulaion Resuls (d) Taiwan (1)Saving rae (%) (3)Pension conribuion rae(index) = (5)Rae of reurn on capial % (2)Wage income ax rae(index) = (4)Economic growh rae (%) (6)Economic welfare of individual cohors 1960 cohors = cohors 24

26 Figure 4 Benchmark Simulaion Resuls (e) Singapore (1)Saving rae (%) (3)Pension conribuion rae(index) = (5)Rae of reurn on capial % (2)Wage income ax rae(index) = (4)Economic growh rae (%) (6)Economic welfare of individual cohors 1960 cohors cohors 25

27 Figure 5 Policy Reform Simulaion Resuls (deviaion from benchmark simulaion) (a) Japan (1)Saving rae (% poins) (3)Economic growh rae (% poins) (5)Economic welfare of individual cohors (%) (2)Wage income ax rae(index) (% poins) (4)Rae of reurn on capial (basis poins) cohor

28 Figure 5 Policy Reform Simulaion Resuls (deviaion from benchmark simulaion) (b) China (1)Saving rae (% poins) (3)Economic growh rae (% poins) (5)Economic welfare of individual cohors (%) (2)Wage income ax rae(index) (% poins) (4)Rae of reurn on capial (basis poins) cohor

29 Figure 5 Policy Reform Simulaion Resuls (deviaion from benchmark simulaion) (c) Korea (1)Saving rae (% (3)Economic growh rae (% poins) (5)Economic welfare of individual cohors (%) (2)Wage income ax rae(index) (% poins) (4)Rae of reurn on capial (basis poins) cohor

30 Figure 5 Policy Reform Simulaion Resuls (deviaion from benchmark simulaion) (d) Taiwan (1)Saving rae (% poins) (3)Economic growh rae (% poins) (5)Economic welfare of individual cohors (%) (2)Wage income ax rae(index) (% poins) (4)Rae of reurn on capial (basis poins) cohor

31 Figure 5 Policy Reform Simulaion Resuls (deviaion from benchmark simulaion) (e) Singapore (1)Saving rae (% poins) (3)Economic growh rae (% poins) (5)Economic welfare of individual cohors (%) (2)Wage income ax rae(index) (% poins) (4)Rae of reurn on capial (basis poins) cohor