Can Investments in Emerging Markets Help to Solve the Aging Problem?

Prefunding of pension commitments in OECD economies is increasingly seen as a central strategy to cope with the aging of their populations. This paper argues that investments in emerging markets can help at the margin but are unable to solve the demographic problem. While these investments bring potential advantages through enhanced risk diversification, higher rates of return, and accelerated financial market development, the total effects are likely to be limited. Furthermore, in order to harvest them, capital sending and receiving countries must fulfill various politically and economically challenging requirements. For pension policy, the limited contribution of pre-funding at home and abroad in order to address the demographic problem implies that enhanced emphasis must be given to domestic reforms.