Population ageing, retirement, and economic growth

This paper explores the impact of increasing longevity and declining fertility on long-term economic growth, focussing on the tension between pension obligations and human capital accumulation. We develop a three-period Overlapping Generations (OLG) model that integrates both private and public education systems, alongside a pay-as-you-go (PAYG) social security scheme. Our baseline analysis highlights that as longevity rises, government expenditure is redirected from education to pensions, dampening economic growth. We demonstrate that delayed retirement can mitigate this by increasing public education spending and reducing the incentive to save among young adults. By implementing a retirement plan that indexes the retirement age to longevity, it is possible to simultaneously achieve targeted growth and replacement rates. Furthermore, we extend the model to include endogenous fertility decisions and intergenerational time transfers, finding that raising the retirement age reduces the supply of grandparental childcare, thereby increasing the opportunity cost of child-rearing and consequently reducing fertility. Private education investment remains stagnant in the endogenous fertility setting, where the income and substitution effects induced by delayed retirement cancel each other out. This finding challenges the standard Ben-Porath mechanism, suggesting that private education investment is unresponsive to longer working lives. Our findings underscore the vital role of public education investment in the formation of human capital.