Demographics, Wealth, and Global Imbalances in the Twenty-First Century

Abstract We use a sufficient statistic approach to quantify the general equilibrium effects of population aging on the returns to wealth, wealth accumulation, and global imbalances. Combining population forecasts with household survey data from 25 countries, we measure the compositional effect of aging: how a changing age distribution affects wealth-to-GDP, holding the age profiles of wealth and labor income fixed. In a baseline overlapping generations model this statistic, in conjunction with cross-sectional information and two standard macro parameters, pins down general equilibrium outcomes. Since the compositional effect is positive, large, and heterogeneous across countries, our model predicts that population aging will lower returns to wealth, increase wealth-to-GDP ratios, and widen global imbalances through the twenty-first century. These conclusions extend to a richer model in which bequests, individual savings, and the tax-and-transfer system all respond to demographic change.