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11.3 Ageing and the Macro Economy 4
The analysis presented thus far has taken a modified view of a classic perspective on
how an economy functions, paying special attention to the role of the productive
system. However, it still fails to capture the full effects of the role of households. A
slightly different version of the model, a more traditional computable general
equilibrium model in the Walrasian tradition integrated with an overlapping
generations framework, was constructed using the same data base to explore
changes in household behavior on the economy whereas the analysis presented
thus far still explores a set of households that are reacting to changes in the
economy rather than generating those changes (see Park and Hewings ( 2009 ) for
more details of the model).
11.3.1 Ageing and Its Impact
To accomplish this task, behavior by households of different ages, 21-85 was
identified; to simplify the analysis, it was assumed that individuals were forward
looking (i.e., they considered the future in making decisions about whether to spend
or save) that they had some uncertainty about how long they would live and that
their income consisted of wage and salary (and dividends) while they were working
and only dividends and pensions in retirement. Further, it was assumed that all
individuals retired at age 65 and died at 85 (see Fig. 11.5 ).
Figure 11.5 also shows the various components of income over a typical
household's lifetime; since it was assumed that individuals die at 85 (or
unexpectedly earlier), their consumption patterns reflect a finite expectation for
the calculation of expenditures from income (drawing down their non pension
assets over the period from 65 to 85). Figure 11.5 assumes an economy in which
there are no changes in the age distribution over time; assume that the expectations
suggested by Fig. 11.2 come into play, how will this effect the expectations
presented in Fig. 11.5 ? It turns out to be a lot more complicated!
Figure 11.6 presents the outcomes under an ageing population scenario. Not
surprisingly, untaxed wages increase under an ageing population, reflecting the
relatively scarcity of labor. Nonetheless, total income decreases over almost all
age cohorts. For working age cohorts, this happens because the sharp increase in
social security tax under ageing population reduces the net wage income from
labor supply. For early retirees, though relatively smaller than workers, the fall in
the interest rate caused by relatively abundant capital contributes to reducing the
capital income from savings. With these different changes in income by age, the
effect of ageing population on savings is also sensitive to the age cohorts. That is,
before the retirement, the difference in saving is not large enough to generate major
interest. The possible reason is that even an ageing population will motivate
4 This section draws on Park and Hewings ( 2007a , b , c , 2009 ).
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