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 t he governmental budgets. Accordingly, several studies ha ve been done on the effects of pop u l a - tion ageing. In the present paper , the purpose is to study how population ageing will affect ca p ital 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 i n crea se in the elderly dependency ratio will increase the long - run capital stock