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MONEY, FINANCE AND DEMOGRAPHY: THE CONSEQUENCES OF AGEING Papers presented at the 26th SUERF Colloquium in Lisbon Edited by Morten Balling, Ernest Gnan and Frank Lierman SUERF Colloquium Volume 2006 Money, Finance and Demography: The Consequences of Ageing A signifi cant ageing trend can be observed in Europe and in other parts of the world. Fertility is decreasing and life expectancy increasing. The impact of migration is growing. The book deals with the implications for fi nancial markets of these demographic trends. Leading economists and fi nancial experts from Europe and the United States evaluate the challenges to public pension systems and the private pension industry. Based on long-term projections of productivity and employment they look at potential growth in GDP per capita and implications for savings and wealth. Pension fund portfolio management is discussed together with the ability of capital markets to serve retirement-fi nancing purposes. Fiscal as well as fi nancial sustainability are analysed in depth. The roles of global imbalances and international capital movements are included. Most chapters also discuss policy implications - in particular with regard to how pension saving incentives and rules and incentives for retirement should be in order to ensure fi scal and fi nancial sustainability. All contributions in the book are based on presentations at the 26th SUERF Colloquium on Money, Finance and Demography – the Consequences of Ageing held on 12-14 October, 2006 in Lisbon sponsored by Banco de Portugal and Millennium bcp and in cooperation with the Universidade Nova de Lisboa. Morten Balling is Emeritus Professor of Finance at the Aarhus School of Business, Denmark. Ernest Gnan is Head of the Economic Analysis Department at the Oesterreichische Nationalbank, Austria. Frank Lierman is Chief Economist at Dexia Bank, Belgium. SUERF – The European Money and Finance Forum Société Universitaire Européenne de Recherches Financières SUERF is incorporated in France as a non-profi t-making Association. It was founded in 1963 as a European-wide forum with the aim of bring- ing together professionals from both the practitioner and academic sides of fi nance who have an interest in the working of fi nancial markets, institutions and systems, and the conduct of monetary and regulatory policy. SUERF is a network association of central bankers, bankers and other practitioners in the fi nancial sector, and academics with the purpose of analys- ing and understanding European fi nancial markets, institutions and systems, and the conduct of regulation and monetary policy. It organises regular Collo- quia, lectures and seminars and each year publishes several analytical studies in the form of SUERF Studies. SUERF has its full-time permanent Executive Offi ce and Secretariat locat- ed at the Austrian National Bank in Vienna. It is fi nanced by annual corporate, personal and academic institution membership fees. Corporate membership currently includes major European fi nancial institutions and Central Banks. SUERF is strongly supported by Central Banks in Europe and its membership comprises most of Europe’s Central Banks as well as the Bank for Inter- national Settlements and the European Central Bank, banks, other fi nancial institutions and academics. Money, Finance and Demography: The Consequences of Ageing Papers presented at the 26th SUERF Colloquium in Lisbon, 12–14 October 2006 Edited by Morten Balling, Ernest Gnan and Frank Lierman Vienna: SUERF (SUERF Colloquium Volume: 2006) ISBN-13: 978-3-902109-37-8 © 2007 SUERF, Vienna Copyright reserved. Subject to the exception provided for by law, no part of this publication may be reproduced and/or published in print, by photocopying, on microfi lm or in any other way without the written consent of the copyright holder(s); the same applies to whole or partial adaptations. The publisher retains the sole right to collect from third parties fees payable in respect of copying and/or take legal or other action for this purpose. Contact address: SUERF Executive Secretary Phone: +43 1 40420 7206 c/o OeNB Fax: +43 1 40420 7298 Otto Wagner-Platz 3 [email protected] A-1090 Vienna www.suerf.org AUSTRIA Contents List of fi gures . vii List of tables . x List of contributors . xii Acknowledgements . xiv List of abbreviations . xv 1. Introduction: Ageing – a Challenge for Economic Policy Makers, Financial Regulators and Financial Markets . 1 MORTEN BALLING, ERNEST GNAN AND FRANK LIERMAN 2. Longevity Risk and Financial Markets . 9 IGNAZIO VISCO 3. Global Imbalances, Demography and China . 31 BARRY EICHENGREEN 4. Looming Demographic Ageing: A Constraint to Economic Growth and Living Standard Increased in the EU 25 . 49 GIUSEPPE CARONE, DECLAN COSTELLO, NURIA DIEZ GUARDIA, GILLES MOURRE, BARTOSZ PRZYWARA AND AINO SALOMÄKI 5. Postponing Retirement: The Politicial Push of Aging . 93 VINCENZO GALASSO 6. A Note on Demand for High-Quality Fixed-Income Bonds: What Demographics may Imply . 119 SEBASTIAN SCHICH AND MARK WETH 7. Sensible Individual Behaviour, Wrong Collective Policies – Why Promoting Private Savings is only Part of the Right Ageing Public Strategy . 135 ETIENNE DE CALLATAŸ vi 8. Implicit Pension Debt and Fiscal Sustainability: An Assessment for Germany . 147 MARTIN WERDING 9. Population Ageing in Italy: Facts and Impact on Household Portfolios . 175 MARIANNA BRUNETTI AND COSTANZA TORRICELLI 10. Ageing, National Savings and the International Investment Position: The Experience of the Netherlands . 213 WIM W. BOONSTRA 11. The Impact of Projected Demographic Developments on Fund Pension Provision in Austria . 239 STEFAN W. SCHMITZ 12. General Government Debt Sustainability in Slovenia . 271 HANA GENORIO Index . 307 Figures 2.1 Old-age dependency ratios 10 2.2 Size of the G10 long-term and inflation-linked bond markets 20 2.3 Reverse mortgages in the United States 26 3.1 Share of Chinese Population by Age Group 32 3.2 US Savings and Investment and their Correlates 39 4.1 Age pyramids for EU25 population 2004 and 2050 59 4.2 Projected employment rates and Lisbon targets 61 4.3 Projected working-age population and total employment, EU25 62 4.4 Employment Projections (change in % of people employed aged 15-64 between 2003 and 2050) for the EU25 Member States 63 4.5 Projected (annual average) GDP growth rates in the EU15 and the EU10 and their determinants (employment/productivity) 67 4.6 Projected demographic and economic dependency ratios for the EU25 71 5.1 Percentage of Elderly in the Total Population 97 5.2 Voter's Time Horizon 102 5.3 Voter's Time Horizon (Italy 1992 and 2050) 103 5.4 Median Age among Voters 104 5.5 Political Equilibria in Italy 114 6.1 Illustration of the pattern of individual households' bond holdings over its life-time 122 6.2a Estimates of future labour force in G-10 countries (levels) 123 6.2b Estimates of future labour force in G.10 countries (growth rates) 123 6.3 Projected future bond demand (in levels and growth rate) Assumption: constant ratio of bond supply to output 124 6.4a Bond demand for different labour productivity assumptions (levels) Assumption: constant ratio of bond supply to output 125 6.4b Bond demand for different labout productivity assumptions (growth rates) 126 6.5a Bond demand for different assumptions regarding effective age of entry into retirement (levels) Assumption: constant ratio of bond supply to output 127 6.5b Bond demand for different assumptions regarding effective age of entry into retirement (growth rates) 127 6.6 G-10 Life expectancy at birth in baseline scenatio and in the case of a longevity shock 128 6.7a Bond demands for different longevity assumptions (levels) Assumption: constant ratio of bond supply to output 129 6.7b Bond demands for different longevity assumptions (levels) Assumption: constant ratio of bond supply to output 130 8.1 Accrued-to-date liabilities and future contributions 2006 165 viii 8.2 Accrued-to-date liabilities and future contributions under the current law 166 8.3 Open-system net liabilities 2006 167 8.4 Open-system liabilites vs. future contributions under the current law 168 8.A1 Level of pension benefits 1957-2050 173 8.A2 Contribution rates 1957-2050 174 8.A3 Annual cost rates 1957-2050 174 9.1 Old-dependency ratio from 1950 to 2050: major world-regions. 177 9.2 Shares of young, middle-aged and old individuals in Italy 181 9.3 Italian population distribution by age-classes: evolution 182 9.4 Absolute number of births and birth rate in Italy, 1950-2005. 183 9.5 Total fertility rate in Italy, 1950-2005 184 9.6 Life expectancy and death rate in Italy, 1950-2005 184 9.7 Immigrants, emigrants and net migration rate in Italy, 1985-2000. 185 9.8 Net migrants in Italy in 2000, by 5-year age-classes. 186 9.9 SHIW data: effects depicted by different reading directions. 191 9.10 Average Household Portfolio by SHIW wave. 192 9.11 Mib30 and Government Bonds Yields 1995-2005 194 9.12 Asset shares grouped by riskyness, by NW quartiles and age-class 1995 202 9.13 Asset shares grouped by riskyness, by NW quartiles and age-class 2004 203 9.14 Top 5% households: asset shares grouped by riskyness across age-classes 204 10.1 Financial account: gross outflow of capital 217 10.2 Financial account: gross outflow of capital 217 10.3 Net International Investment Position of The Netherlands 1986-2004 218 10.4 Change in International Position 1987-2004 219 10.5 Gross Foreign Assets (% GDP) 220 10.6 Gross Foreign Liabilities (% GDP) 221 10.7 Change in Net IIP and Cumulative Current Account 221 10.8 Change in Net FDI Position 224 10.9 Change
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