Journal of Pension Economics and Finance

Articles

Education, demographics, and the economy

CHRISTIAN JAAGa1*

a1 Institiute of Public Finance and Fiscal Law, University of St. Gallen, Varnbüelstrasse 19, CH-9000 St. Gallen (e-mail: christian.jaag@unisg.ch)

Abstract

This paper deals with two issues concerning the effects of population aging on education decisions in the presence of a PAYG pension system: We first analyze the effects of an aging population per se on individual skill choices and continuous education and the production structure. Second, we study the implications of postponed retirement, which is often proposed as a measure to cope with the economic challenges of increased longevity. Our study uses a dynamic general equilibrium framework with overlapping generations and probabilistic aging. The model allows for capital–skill complementarity in the production of final output.

As a response to population aging, in a small open economy with a fixed interest rate, our first simulation shows that GDP is depressed due to an adverse effect on skill choice and labor supply. We then introduce postponed retirement as a potentially dampening policy measure due to its encouragement of human capital formation. However, since there is less private saving in this scenario, the overall effect on GDP is even worse than in the pure aging scenario.

(Online publication November 16 2007)

Footnotes

* I am grateful to Christian Keuschnigg, Mirela Keuschnigg, and Dominik Grafenhofer for our fruitful collaboration. Valuable comments by Ben Heijdra and two referees greatly improved the paper. All remaining errors are mine. Financial support from the Swiss National Science Foundation under project no. 1214-066928 is gratefully acknowledged.