Population structure and asset values

Population structure and asset values

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Speaker(s): Kathleen Rybczynski (University of Waterloo)

With the large baby-boom cohort entering retirement, many are concerned that the expected drop in saving and investment will result in substantially diminished asset prices and compromised pension plans. This paper contributes to the quantification of the link between population structure and asset values, by generating returns on assets in the presence of demographic change. We carry this out in the context of a large scale computable Overlapping Generations Model (OLG) with endogenous labour supply, aggregate risk, and two asset classes. Our model generates typical age-specific asset holdings and consumption patterns, and results in age-specific portfolio allocations consistent with the data. We use counterfactuals to predict the outcome of changes in demographic structure, and find that asset prices are moderately lower with an older population. Specifically, a reasonable increase in the survival probability of households over age 65 results in a 4.16% drop in the return on capital, and a 3.02% drop in the return on bonds. While our baseline model employs a two-pillar pension system (a pay-go public provision plus private saving), we also explore a three-pillar pension system (adding a publicly administered, partially funded, employment-related plan) and consider the implications of tax and pension policy on economic outcomes. This framework will be helpful to assess the implications of the expansion of the Canada Pension Plan. Additional modifications include a bequest motive and age dependent health care costs.

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