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The implications of an ageing population for the UK economy
Garry Young

garry.young@bankofengland.co.uk

The views expressed in this paper are those of the author and do not necessarily reflect those of the Bank of England. I am grateful to seminar participants at the Bank of England, Financial Services Authority and National Institute of Economic and Social Research and two anonymous referees for comments on earlier drafts. This paper has been prepared as background to a study on the implications of an ageing population for the financial services industry and its regulation. This wider study is being conducted by the Financial Services Authority in co-operation with the Bank of England.

Copies of working papers may be obtained from Publications Group, Bank of England, Threadneedle Street, London, EC2R 8AH; telephone 020 7601 4030, fax 020 7601 3298, e-mail mapublications@bankofengland.co.uk

Working papers are also available at www.bankofengland.co.uk/wp/index.html

The Bank of England’s working paper series is externally refereed.

© Bank of England 2002 ISSN 1368-5562

Contents Abstract Summary 1. Introduction 2. Demographic change in the United Kingdom 3. Assessing the impact of demographic change 4. The likely impact of demographic change on asset prices and rates of return 5. Conclusion References Charts 5-7 5 7 9 10 19 29 34 38 40

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Abstract This paper considers the likely development of aggregate living standards in the United Kingdom over the course of this century and some of the risks to this outlook. It argues that even under relatively cautious assumptions about technological progress and capital accumulation, aggregate living standards (as measured by GDP per head) are set to double over the next 50 years. While there are clear risks to this aggregate outlook, these would be present even without demographic change. The paper also discusses the risks to the living standards of individuals and individual cohorts. These risks have changed in three main ways as a result of demographic change. First, ageing has been a factor throughout the world in encouraging a shift from public to private provision for old age, increasing the proportion of retired people exposed to risks to market prices and rates of return. Second, the size of the group exposed to such risks is growing larger as a direct result of ageing. Third, any adverse effects of demographic change are most likely to be felt in old age ; one of the effects of people living longer is that the y have to spread their lifetime incomes over more years of life, implying a need for more saving when working. If this does not occur, then consumption has to be a lot lower in old age than would have been the case had proper provision been made for retirement.

JEL classification: D91, E27, G12, H55, J11. Key words: Demographic change, overlapping generations, savings.

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Summary This paper discusses the impact of demographic change on the UK economy, looking at effects on GDP growth and GDP per head, saving and capital investment, interest rates, asset prices and the distribution of national income. It also considers the risks associated with demographic change. A key finding, widely supported in the academic literature, is that even under relatively cautious assumptions about technological progress and capital accumulation, aggregate living standards (as measured by GDP per head) are set to double over the next 50 years. While there are clear risks to this aggregate outlook, these would be present even without demographic change. The impact of ageing on the rate of saving and capital accumulation is one of the key uncertainties surrounding any projection of long-term growth. The paper analyses this in the context of a model where people are reliant on their own saving for their retirement income and considers three different types of demographic shocks: a baby boom, an increase in longevity and a decline in fertility. The overlapping...
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