Saving in an ageing society with public pensions: implications from lifecycle analysis

This paper studies saving in an economy where decline in fertility to a permanently lower level and increasing longevity are changing the age structure permanently and where the public pension system helps to smooth consumption over a lifetime of working and retirement. A simple overlapping generations (OLG) model is used for simulations, with the emphasis on the transition path. It is shown that, under plausible assumptions, the effect of population ageing on the capital to income ratio is positive and also that the saving rate increases in the first two to three decades. This first positive effect on the saving rate is highlighted and contrasted with results in previous literature. It is also shown that moving from a pure PAYG pension system to partial funding of mandatory pensions affects saving positively and has implications for intergenerational equity.