Pension reform, savings behavior and corporate governance

France, Germany and Italy, to take the three largest economies in continental Europe, have large and ailing pay-as-you-go public pension systems, very thin capital markets, and low capital performance. This paper proposes to study these three issues together, taking Germany as an example. Specifically, we argue that pension reform, via a change in portfolio composition of households and a strengthening of corporate governance through institutional inves-tors, can have important beneficial side effects both in terms of capital efficiency. Discussions about pension reform should therefore be broader than the narrow debate on how to diffuse the future financial strain caused by population aging. We suggest that looking at pension reform and capital market problems together sheds additional and new light on the continuing debate about advantages and disadvantages of pay-as-you-go and fully funded pension systems.

Aging and International Capital Flows

Throughout the world, population aging is a major challenge that will continue well into the 21st century. While the patterns of the demographic transition are similar in most countries, timing differs substantially, in particular between industrialized and less developed countries. To the extent that capital is internationally mobile, population aging will therefore induce capital flows between countries. In order to quantify these international capital flows, we employ a multi-country overlapping generations model and combine it with long-term demographic projections for several world regions over a 50 year horizon. Our simulations suggest that capital flows from fast-aging industrial countries (such as Germany and Italy) to the rest of the world will be substantial. Closed-economy models of pension reform are likely to miss quantitatively important effects of international capital mobility.

Population Aging, Savings Behavior and Capital Markets

Population aging is just beginning to hit the industrialized countries in full force, and it will have a tremendous impact on capital markets. In this paper, we argue that the capital market effects of population aging are particularly strong in continental European economies such as Germany, France, and Italy, with their large and ailing pay-as-you-go public pension systems, relatively thin capital markets, and poor capital performance. The younger generations in these countries are quite aware of the need to provide for more retirement income through own private saving, and these effects will be accentuated by fundamental pension reforms that aim at more pre-funding. Population aging changes households' savings behavior and portfolio composition, and much more assets will be invested on the stock market. Capital markets will grow in size, and active institutional investors such as pension funds will become more important in continental European countries. These changes are likely to have beneficial side effects in terms of improved capital efficiency, total factor productivity, and growth. Looking at the effects of population aging on savings behavior and capital markets therefore adds a new dimension to the continuing debate about advantages and disadvantages of pay-as-you-go and fully funded pension systems.

Pension reform, savings behavior and capital market performance

This paper shows that the capital market effects of population aging and pension reform are particularly strong in continental European economies such as France, Germany, and Italy. Reasons are threefold: these countries have large and ailing pay-as-you-go public pension systems, relatively thin capital markets and less than benchmark capital performance. The aging process will force the younger generations in these countries to provide more retirement income through own private saving. Capital markets will therefore grow in size and active institutional investors will become more important as intermediaries. Aim of this paper is to show that these changes are likely to generate beneficial side effects in terms of improved productivity and aggregate growth.

Aging, Pension Reform, and Capital Flows:

We present a quantitative analysis of the effects of population aging and pension reform on international capital markets. First, demographic change alters the time path of aggregate savings within each country. Second, this process may be amplified when a pension reform shifts old-age provision towards more pre-funding. Third, while the patterns of population aging are similar in most countries, timing and initial conditions differ substantially. Hence, to the extent that capital is internationally mobile, population aging will induce capital flows between countries. All three effects influence the rate of return to capital and interact with the demand for capital in production and with labor supply. In order to quantify these effects, we develop a computational general equilibrium model. We feed this multi-country overlapping generations model with detailed long-term demographic projections for seven world regions. Our simulations indicate that capital flows from fast-aging regions to the rest of the world will initially be substantial but that trends are reversed when households decumulate savings. We also conclude that closed-economy models of pension reform miss quantitatively important effects of international capital mobility.25 August, 2004

Aging, pension reform, and capital flows: A multi-country simulation model

In this paper, we present a quantitative analysis of the international capital flows induced by differences in population aging processes across countries and by pension reforms. In the vast majority of countries, demographic change will continue well into the 21st century. It is well known that within each country, demographic change alters the time path of aggregate savings, even more so in countries where fundamental pension reforms and shifts towards more pre-funding are implemented. While the patterns of population aging are similar in most countries, the timing differs substantially, in particular between industrialized and less developed countries. To the extent that capital is internationally mobile, population aging will therefore induce capital flows between countries. In order to quantify these effects, we develop a stylized multi-country overlapping generations model, and we use long-term demographic projections for several world regions to simulate international capital flows over a 50 year horizon. Our simulations suggest that capital flows from fast-aging industrial countries such as Germany to the rest of the world will be substantial. Closed-economy models of pen-sion reform are likely to miss quantitatively important effects of international capital mobility.

Aging and International Capital Flows

Throughout the world, population aging is a major challenge that will continue well into the 21st century. While the patterns of the demographic transition are similar in most countries, timing differs substantially, in particular between industrialized and less developed countries. To the extent that capital is internationally mobile, population aging will therefore induce capital flows between countries. In order to quantify these international capital flows, we employ a multi-country overlapping generations model and combine it with long-term demographic projections for several world regions over a 50 year horizon. Our simulations suggest that capital flows from fast-aging industrial countries (such as Germany and Italy) to the rest of the world will be substantial. Closed-economy models of pension reform are likely to miss quantitatively important effects of international capital mobility.

Pension reform, savings behavior and corporate governance

France, Germany and Italy, to take the three largest economies in continental Europe, have large and ailing pay-as-you-go public pension systems, very thin capital markets, and low capital performance. This paper proposes to study these three issues together, taking Germany as an example. Specifically, we argue that pension reform, via a change in portfolio composition of households and a strengthening of corporate governance through institutional inves-tors, can have important beneficial side effects both in terms of capital efficiency. Discussions about pension reform should therefore be broader than the narrow debate on how to diffuse the future financial strain caused by population aging. We suggest that looking at pension reform and capital market problems together sheds additional and new light on the continuing debate about advantages and disadvantages of pay-as-you-go and fully funded pension systems

Soziale Sicherungssysteme im globalen Wettbewerb

Drei Entwicklungen werden die Sozialpolitik des neuen Jahrhunderts in Deutschland prägen: die Alterung der Bevölkerung, die zunehmende Mobilität und Farbigkeit der Lebens- und Erwerbshistorien sowie der Wertewandel, der die Sozialleistungen des Staates zunehmend Dienstleistungen gleichstellt. Die von diesen Entwicklungen ausgehenden Herausforderungen müssen vor dem Hintergrund eines zunehmenden globalen Wettbewerbs gesehen werden. Wir zeigen in diesem Beitrag, daß die Globalisierung die Krise des Sozialstaates nicht verursacht hat. Sie wird unsere derzeit noch recht großzügigen Systeme der sozialen Sicherung auch nicht durch "Sozialdumping" in die Knie zwingen - wenn der Sozialstaat in geeigneter Weise reformiert wird. Darüber hinaus bietet die globale Verflechtung bei einem Übergang zu verstärkter Kapitaldeckung in der Altersvorsorge sogar die Chance, durch die Ausnutzung internationaler Unterschiede in Kapitalnachfrage und -angebot die Belastungen des demographischen Wandels, der eine der größten Bedrohungen unserer sozialen Sicherungssysteme darstellt, abzumildern