Aging, pension reform, and capital flows: A multi-country simulation model

We present a quantitative analysis of international capital flows induced by differ-ential population aging and pension reform. It is well known that within each country, demo-graphic change alters the time path of aggregate savings. This process may be amplified if pension reform shifts old-age provision towards more pre-funding. While the patterns of population aging are similar in most countries, timing and initial conditions differ substan-tially. Hence, to the extent that capital is internationally mobile, population aging will induce capital flows between countries. In order to quantify these effects, we develop a multi-country overlapping generations model and use long-term demographic projections for several world regions to project international capital flows in the course of population aging. Our simula-tions suggest that capital flows from fast-aging industrial countries such as Germany, Italy or Japan to the rest of the world will be substantial. We also conclude that closed-economy mod-els of pension reform miss quantitatively important effects of international capital mobility.