Project in detail

Project The influence of social security systems on international capital flows

Members of this project:



This project, which is funded by the Volkswagen Foundation, examines the implications of social security reforms on the interdependences between demographics and international capital flows. The project looks to the future and, by drawing on a multi-region simulation model developed by MEA, aims to forecast future capital flows. The key results of work undertaken so far reveal that: Capital outflows mitigate the decline in capital returns which the greater supply of capital induced by population aging and reforms to the pension system may be expected to induce. Other project results: As Börsch-Supan, Heiss, Ludwig and Winter have demonstrated in an overlapping generations model for a closed economy, population aging has significant effects on capital markets, particularly in terms of household savings behaviour and capital returns. In this context and as a result of population aging, the savings rate of German households is predicted to fall by around 9 percentage points in the period 2000 to 2035 and, as a result, capital returns are expected to drop by a little more than half a percentage point. The authors also demonstrate that Germany’s recent “Riester” pension reform does not go far enough towards solving the future problems of the pay-as-you-go element of the German pension system and is also unlikely to have more than a marginal impact on the capital market. In contrast, a more fundamental reform of pensions, such as the “freezing model” proposed by Börsch-Supan (2002), would have more appreciable effects on the national capital market: the savings rate would increase by around one percentage point and capital returns would fall by about half a percentage point. From this starting point, Börsch-Supan, Ludwig and Winter (2002) then draw on a variant of the model which includes international capital mobility to demonstrate that fallacious models of a closed economy overestimate both the effect of aging in itself as well as the effect of fundamental reform on capital returns. Capital outflows from an aging economy such as Germany’s to countries less strongly affected by the aging process generate higher capital returns on average and iron out some of the fluctuations caused by demographic change. Based on a multi-country simulation model of free capital mobility within the OECD developed as part of the VW project, the decline in capital returns induced by pension reform is around one tenth of the reduction which would result in a closed economy. Alongside this project, the VW Foundation also funds two more projects focusing on "Aging and international capital flows": "Demographic effects on international capital flows" and "Measures of international capital mobility and determinants of capital market imperfections".

MEA Discussion Papers arisen from this project:

Publications arisen from this project:
  • Börsch-Supan, Axel; Ludwig, Alexander; Winter, Joachim (2006): Aging, pension reform, and capital flows: A multi-country simulation model, Economica, 73, 292, 625-658
  • Ludwig, Alexander (2005): The Macroeconomics of Demographic Change - Essays on Economic Modelling
  • Börsch-Supan, Axel (2004): Commentary: Cross-Border Macroeconomic Implications of Demographic Change, Gordon H. Sellon, Jr., Global Demographic Change: Economic Impacts and Policy Challenges, A Symposium Sponsored by The Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 26-28, 2004, 145-154
  • Börsch-Supan, Axel; Ludwig, Alexander; Winter, Joachim (2004): Aging, Pension Reform, and Capital Flows: A Multi-Country Simulation Model, MEA Discussion Paper 064-04
  • Börsch-Supan, Axel; Heiß, Florian; Ludwig, Alexander; Winter, Joachim (2003): Pension Reform, Capital Markets, and the Rate of Return, German Economic Review, 4, 2, 151-181
  • Börsch-Supan, Axel; Ludwig, Alexander; Winter, Joachim (2003): Alterung, deutsche Renditeentwicklung und Kapitalmärkte, Aktuelle Themen, Deutsche Bank Research, Heft 273
  • Börsch-Supan, Axel; Ludwig, Alexander; Winter, Joachim (2003): Ageing, the German rate of return and global capital markets, Demography Special, 273
  • Börsch-Supan, Axel; Ludwig, Alexander; Winter, Joachim (2002): Aging and International Capital Flows, Auerbach, A.J., Hermann, H., Aging, Financial Markets and Monetary Policy, Springer, Berlin, Heidelberg, New York, 55-83
  • Börsch-Supan, Axel; Heiß, Florian; Ludwig, Alexander; Winter, Christoph (2002): Pension reform, capital markets, and the rate of return, MEA Discussion Paper 023-02
  • Börsch-Supan, Axel; Reil-Held, Anette (1993): Macroeconomic Implications of Population Aging, nnb, Washington

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