RDP 2006-06: Ageing, Retirement and Savings: A General Equilibrium Analysis 6. Conclusion

In this paper we study the macroeconomic consequences of ageing. We emphasise the distinction between the drivers of ageing that is often ignored in the literature. Both longevity and fertility influence the economy independently, but they also operate together by magnifying the effects of ageing in a number of respects. Moreover, during the transition to a new steady state, these two factors have very different implications for the behaviour of wages and real interest rates.

Healthy lifespan extensions increase the absolute number of years in retirement, but the fraction of life spent in the workforce could rise or fall. A longer lifespan provides more years over which to accumulate capital from compounding interest income. But, in general equilibrium, a longer time spent in retirement increases the supply of capital and lowers the interest rates over which to compound.

We find that a permanent fall in the fertility rate increases capital intensity, raising wages and lowering interest rates, and delays retirement. When life expectancy increases, the economy also converges to an equilibrium with a higher capital intensity, but the transition to the steady state looks quite different. If health improves hand-in-hand with life expectancy (which appears plausible), the economy would initially undergo a period of relatively low wages and high interest rates. This effect would be reversed in the long run, as capital accumulates when workers build a larger pool of savings to fund more years in retirement. When fertility falls and lifespans increase at the same time, the capital-to-labour ratio converges to a level which is higher than the sum of the two acting alone, and the transition to the new steady state involves periods of relatively abundant labour and low wages.