Optimal Private Responses to Demographic Trends: Savings, Bequests and International Mobility

The paper examines the implications of population ageing in an environment of increasingly mobile capital and labour. I first present three benchmark models for world savings, capital-output ratios and returns to capital and then examine their relevance for the world economy and their policy implications. The mechanics of capital deepening triggered by declining birth rates are presented in a Solow-Swan model with exogenous saving. The role of retirement savings is examined in a stylised overlapping-generations model with life-cycle savers. A dynastic model with altruism towards children highlights the interaction of savings with bequests and spending on children. All three models are calibrated to the world economy with particular attention to the G-20. The models yield different conclusions largely due to their different assumptions about bequests. While the Solow-Swan and life-cycle models suggest rising capital-labour ratios, rising capital-output ratios and a secular decline in returns to capital, the dynastic model predicts declining saving rates, a declining share of bequests in aggregate wealth and a stationary world return on capital. A substantial share of world capital is due to bequests rather than life-cycle savings. This raises doubts about the life-cycle model as a tool for demographic projections. At the same time, the projected decline in bequests also raises questions about bequests reaching a lower bound where life-cycle reasoning would become applicable. I argue that constraints on bequests are likely to be “soft” (non-binding) for as long as retirees can successfully lobby for growing public transfers (serving as negative bequests). Increasing capital and labour mobility are relevant in this context because increasing cross-country tax competition would impose increasingly stringent bounds on transfers and hence on aggregate bequests. While developed countries may be close to such bounds, bequests and dynastic reasoning remain important for savings in developing countries and hence for world-wide demographic projections.