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Demographic change can be observed throughout Europe. A bulk of literature has focused on ways to mitigate the consequences of ageing by reforming existing institutions of the welfare state. Another way to alleviate the long-run consequences of an ageing population is to re-verse the demographic development by increasing the fertility rate. This is...
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Context 1
... the argumentation of Sinn, Dalgaard & Kreiner (2001) come to a different conclusion. Allowing for endogenous skill formation they find that it is not the quan- tity of citizens but solely the skill level of the average citizen that matters for the long-run level of per capita income. Cutler et al. (1990) find some evidence in a cross national analysis that nations with slower labour force growth experience more rapid productivity growth. Meijdam and Verbon (1997) argue that a decreasing number of children require a lower capital stock in order to keep per capita production at its former level (capital-thickening effect). This could lead to higher consumption pos- sibilities for young and old. On the other hand, ageing also implies that total output per worker has to be shared with a larger number of pensioners (Dependency-ratio effect). In the long run they detect that the latter effect dominates the former thus individual utility decreases as the population is ageing. The discussion above shows that the economic consequences of ageing are not always considered negative. Nevertheless, when analysing the effects on social security programs it is not possible to come up with an example in which ageing does not cause problems. When Konrad Adenauer reformed the German pension system in 1957 towards a pay-as-you-go system with pensions adjusted for productivity growth he assumed that people would always have children. This assumption, however, turned out to be fatal leading to a large financial deficit in the pension system today. Figure 3 below shows that already in 1970 Germany’s fertility rate decreased below the replacement rate of 2.1 which is needed to keep the population ...
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... and neither economists nor politicians should bother decreasing life- expectancy again. On the other hand fertility rates declined throughout the whole of Europe. Nowadays, it does not even reach the replacement rate of 2.1 children per woman which is needed to keep the population constant. Figure 3 below shows that France, Denmark and Sweden which face a lower dependency ratio than Germany also have a considerably higher fertility rate which is 1.9, 1.8, 1.7 and 1.3 in Germany respectively. Since the number of people of working age directly enters the calculation of the dependency ratio, it is obvious that a higher fertility rate will constitute a lower dependency ratio in the long run. The key to decrease population ageing is the fertility rate. The fertility rate of the United States is higher than the one in the European Union (Figure 2). According to Sinn (2005) this holds the risk that Europe will never man- age to catch up with the innovative power of the United States. He argues that scien- tists of all disciplines attain their maximum performance at age 35 on average. As this age group is shrinking so also does the innovative power, the establishment of new business and hence dynamic growth. However, when identifying the long-run consequences of low fertility, researchers are discordant. While Romer (1986, ...
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