Population Ageing and Capital Accumulation: A Simple OLG Model with PAYGO Pensions

Abstract

Population in developed countries has dramatically aged in recent years. At the same time, most of these countries finance their old-age public pension benefits on a pay-as-you-go (PAYGO) basis. Such a pension scheme combined with an ageing population, represent a financial challenge for the governmental budgets. Accordingly, several studies have been done on the effects of population ageing. In the present paper, the purpose is to study how population ageing will affect capital accumulation. A simple OLG model with PAYGO pension is applied. The formulation of the model makes it possible to deduce an explicit expression for this relation. It is shown that an increase in the elderly dependency ratio will increase the long-run capital stock.