Demography and Retirement: The Twenty-First Century

By Anna M. Rappaport; Sylvester J. Schieber | Go to book overview

Discussion

Alicia H. Munnell

Alan Auerbach and Laurence Kotlikoff have done their assignment; they have predicted the impact of the upcoming demographic shift on saving and capital formation. They conclude that the significant projected increase in the elderly and the young relative to the working-age population will substantially depress the national saving rate beginning around the year 2010. Their conclusion rests on the standard life-cycle model where households accumulate wealth in their working years and then draw down their wealth to support themselves in retirement. According to this theory, the demographic shift should produce a dramatic increase in the number of dissavers relative to savers and this development should substantially reduce national saving. Who can argue with that logic?

While the logic may be flawless, the importance of demographics as opposed to other factors in determining national saving deserves some consideration. In fact, three things should make us somewhat cautious about incorporating a lower saving rate into our national strategic planning.

The first, which the authors acknowledge themselves, is the evidence from the 1980s. Their model, as well as several others, suggests that, based on demographics, the saving rate should have increased during the 1980s. The projected rise in private saving should have occurred because the large decline in the proportion of the population that was young swamped the increase in the proportion that was old. But instead of a projected rate of 12.8 percent, saving averaged 4.3 percent for the decade. This means either that demographic factors are not very important or that other influences overwhelmed the demographics. The difficulty is that economists have been at a loss to explain the behavior of national saving during the 1980s. Studies have explored the impact of capital gains from equities and housing, the effects of higher real interest rates, a reduction in the need for precautionary saving, the effect of slower income growth, and a host of other factors as possible reasons for the precipitous decline in saving. Unfortunately, to date the puzzle remains unsolved. However, the fact that models based on demographics were off by nearly 200 percent in projecting the 1980s saving rate suggests that forecasts for the future should be taken with a grain of salt.

The second argument for caution in interpreting the results is the fragility of the evidence documenting the importance of demographics. The strongest piece of evidence comes from a series of cross-sectional studies comparing international differences in saving rates ( Modigliani 1970, Feldstein 1980, Modigliani and Sterling 1983, and Horioka 1989). These studies, which were originally undertaken to determine the impact of social security on saving, generally found a statistically significant negative relationship in the late 1960s and early 1970s

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Demography and Retirement: The Twenty-First Century
Table of contents

Table of contents

  • Title Page iii
  • MEMBERS OF THE PENSION RESEARCH COUNCIL v
  • Purpose of the Council vii
  • Contents ix
  • 1: Overview 1
  • Introduction 1
  • 2: Demographic Change in the United States, 1970-2050 19
  • ENDNOTES 47
  • Stephen C. Goss 53
  • Barry Edmonston 57
  • Introduction 57
  • 3: Expected Changes in the Workforce and Implications for Labor Markets 73
  • Introduction 73
  • Joseph F. Quinn 105
  • 4: Can Our Social Insurance Systems Survive the Demographic Shifts of the Twenty-First Century? 111
  • Introduction 112
  • ENDNOTES 148
  • 5: The Impact of the Demographic Transition on Capital Formation 163
  • Introduction 163
  • ENDNOTES 180
  • Alicia H. Munnell 183
  • 6: Implications of Demographic Change for Design of Retirement Programs 189
  • 7: Trends in Health Among the American Population 225
  • Introduction 225
  • ENDNOTES 242
  • Discussions 243
  • 8: Population Aging and Retirement Policy: An International Perspective 255
  • Introduction 255
  • ENDNOTES 284
  • Robert J. Myers 293
  • Bibliography 297
  • Index 315
  • Contributors 323
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