Macroeconomic Effects of the Population Ageing Phenomenon

Abstract

In the next decades, Romania will experience demographic changes that are likely to have a significant impact on its economic development. Using an overlapping generations model in the Auerbach-Kotlikoff tradition, I attempt to assess the effects of the ageing population phenomenon. The driving force of the model is the population evolution which is imposed as exogenous and is based on projections from Eurostat. The study is not designed to provide precise forecasts but rather a set of economic trends which are likely to be induced by the demographic transition. Simulations covering the next 100 years were conducted under two alternative scenarios, depending on the method of balancing the social security budget. First, I assume the contribution rate adjusts in order to cover the growing financing needs. Second, the contribution rate is constant and the pension to wage ratio (and indirectly the pension) adjusts. The possibility of increasing the retirement age was also considered. The results confirm that the population ageing has a greater impact in the first scenario.population ageing