## _wp14139 - 1. Savings Rate for Different Age Groups

## Source details

**Canonical URL:** [_wp14139 - 1. Savings Rate for Different Age Groups](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14139.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14139.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14139.pdf.json)

---

### I. Introduction
- Japan is aging rapidly: highest life expectancy in the world; working-age population started to decline around the early 1990s; the baby-boom generation (born in 1947–49) started retiring in 2007.
- Paper objectives (using the IMF’s Global Integrated Monetary and Fiscal (GIMF) model):
  - Under an unchanged monetary policy reaction function, quantify channels and effects through which population aging affects inflation and the neutral real interest rate.
  - Assess the extent to which life-cycle saving considerations neutralize the impact of aging on growth and inflation.
  - Analyze how fiscal consolidation interacts with aging effects on inflation.
  - Evaluate macroeconomic and structural policy responses to counter aging effects on the economy.

### II. Potential channels through which aging affects inflation (literature and mechanisms)
- Changes in relative prices (including land):
  - Shrinking/aging population lowers land prices; elderly consume less housing, transportation, communication, education and more medical and utilities (see Figure 2).
- Life-cycle savings and portfolio rebalancing:
  - Aging can shift aggregate portfolios toward safe assets, exerting downward pressure on government bond yields and affecting traded vs. nontraded goods prices.
- Fiscal consolidation and excess supply:
  - Aging raises government outlays on pensions and health care while shrinking the tax base; for Japan, aging-related fiscal expenditure projections are relatively modest, so the fiscal channel is driven mainly by high initial debt and deficit levels.
- Political economy and policy objectives:
  - Aging may alter societal preferences over inflation vs. real returns; Bank of Japan’s recent adoption of a higher inflation target via aggressive QQE suggests political economy effects can be countered by policy.
- Selected empirical/theoretical findings summarized:
  - Konishi and Ueda (2013): aging can be deflationary if caused by unexpected increases in longevity, inflationary if caused by declines in birth rate.
  - Ikeda and Saito (2012): decline in labor-force participation reduced the real interest rate in Japan; falling land prices amplify this under collateral constraints; total factor productivity is an important driver of real rate variation.
  - Lindh and Malmberg (1998, 2000): increases in population of net savers dampen inflation; younger retirees consuming pension claims can fan inflation.
  - Katagiri (2012): demand shifts from durables to services increase structural unemployment and reduce aggregate productivity growth, producing deflationary effects in Japan.

### III. GIMF model summary (features relevant to aging analysis)
- Model architecture and frictions:
  - Multicountry DSGE with optimizing households and firms; finite planning horizons and full intertemporal stock-flow accounting.
  - Frictions: sticky prices and wages, real adjustment costs, liquidity-constrained households; non-Ricardian OLG structure yields fiscal non-neutrality.
  - Asset markets incomplete: government debt held domestically; tradable international asset is U.S. dollar one-period bond.
  - Financial accelerator a la Bernanke, Gertler and Gilchrist (1999): external financing premium rises with indebtedness.
  - Multi-region: United States, euro area, Japan, emerging Asia (including China), Latin America, rest of world.
- Household sector:
  - Two household types: OLG with 20-year planning horizon; LIQ (liquidity-constrained) who consume current income (marginal propensity to consume = unity).
  - OLG households save via domestic government bonds, U.S. dollar bonds, fixed-term deposits.
  - OLG finite horizon implies temporary fiscal changes affect consumption; permanent government debt leads to crowding out via higher real interest rates.
- Production and financial sectors:
  - Firms produce tradable and nontradable intermediate goods; firms have finite horizons, face nominal rigidities and adjustment costs.
  - Land included as a fixed factor and source of wealth only for Japan.
  - Limited financial asset menu; banks intermediate deposits and loans; lending rate includes external financing premium; uncovered interest parity does not hold due to country risk premiums.
- Policy features:
  - Explicit bilateral trade flows and exchange rates; fiscal rule ensures long-run debt-to-GDP convergence but allows short-run countercyclical policy.
  - Monetary policy uses an inflation-forecast-based interest rate rule; the model endogenously reacts to inflation shocks.
  - “Shadow” policy rate concept used (rate absent the zero-lower bound).

### IV. GIMF simulation inputs and quantitative results (underlying pressures of aging)
- Modeling constraints and calibration:
  - GIMF extended to include land for Japan; retirement decisions not explicit—declines in labor force participation imposed using U.N. demographic projections.
  - Decline in ratio of private savings to GDP assumed about 3.5 percentage points between 2012–40 (consistent with Hoshi and Ito (2012)): example where aggregate savings to GDP decline from about 2.8 percent in 2012 to about -1.3 percent in 2040.
- Layered simulation scenarios and key quantitative outcomes:
  - Labor force decline layer (blue line in Figure 3):
    - Labor force declines by roughly ¼ percent a year for 30 years (calibrated to UN median forecast for Japan’s working-age population).
    - Consequences: consumption and investment fall; falling labor supply raises real wages and reduces demand for capital and land; land prices fall; real effective exchange rate appreciates; increased imports; continuous downward pressure on inflation.
    - Monetary reaction: “shadow” policy rate reduces by about 20 basis points; inflation falls by about 10 basis points.
    - Public debt-to-GDP ratio rises gradually due to trend decline in nominal GDP.
  - Declining savings / dissaving layer (red line in Figure 3):
    - Japanese household savings rate decreased from around 15 percent of disposable income to around zero in 2011.
    - Demographic factors accounted for about 4 percentage points (one-third) of the decline in the aggregate savings rate (Table 2); aging subtracts about 0.1 to 0.2 percentage point from the savings rate each year—simulation uses the lower bound of this estimate.
    - Dissaving by the elderly results in repatriation of foreign savings, producing real exchange rate appreciation that more than offsets the inflationary demand effects from retirees’ consumption.
  - Rising sovereign risk premium layer (green line in Figure 3):
    - Scenario assumes risk premium rises by 5 basis points per year.
    - Effects: further output contraction, government debt-to-GDP rises further.
  - Combined effects (all three developments):
    - Combined impact raises public debt by 10 percent of GDP by 2030, relative to the baseline.
    - Lowers inflation by about 0.3 percentage points on average during 2013–30 despite a decline in the “shadow” policy rate of about 60 basis points on average during the same period.
- Additional empirical decomposition:
  - Using Iwaisako and Okada (2010) savings rates by age groups and IMF calculations: demographic factors accounted for about 4 percentage points of the decline; role of aging gained importance since 1998 (about 3 percentage points out of a 5 percentage point decline due to aging, with change in propensity to consume adding another 2 percentage points).

### V. Policy implications, simulations and prescriptions
- Fiscal consolidation necessity and calibration:
  - Japan needs significant fiscal consolidation given high initial deficits and debt; simulation assumes an adjustment of 1 percent of GDP each year during 2016–25 over and above approved consumption tax increases in 2014 and 2015.
  - Composition of adjustment: consumption tax increases account for 66 percent of needed adjustment; lower public consumption accounts for 34 percent.
  - Effects of consolidation:
    - Avoids rise in risk premium but consumption and land prices decline markedly, exerting further downward pressure on the “shadow” policy rate and inflation.
    - Consolidation more than offsets decline in private savings, leading to further accumulation of net foreign assets.
    - Fiscal consolidation effects on neutral real rate exceed effects of population aging (including via real exchange rate).
- Complementary policies and simulated policy package (red line in Figure 4):
  - Structural reforms assumed to raise potential growth by ¼ percentage point by 2015 and by ½ percentage point by 2018.
  - Aggressive monetary easing and effective forward guidance assumed to converge inflation expectations quickly toward a 2 percent inflation target.
  - Outcomes: such a package can offset aging’s deflationary effects, support growth and fiscal sustainability by raising inflation expectations (reducing real interest rate and stimulating investment) and modestly higher potential growth.
- Recommended structural measures that directly address population aging:
  - Stimulate female and older workers’ labor force participation.
  - Greater opportunities for immigration, particularly in areas with labor shortages.

### VI. Conclusions (principal findings)
- Aging tends to exert deflationary pressures through relative price changes: falling labor force participation affects nominal wages and triggers adjustments in capital and land prices.
- For Japan specifically:
  - Dissaving by the elderly causes repatriation of foreign savings, leading to real exchange rate appreciation and net deflationary impact.
  - As private aggregate savings decline and government financing needs remain large, the sovereign risk premium may rise gradually, further reducing inflation and the “shadow” policy rate under an unchanged monetary reaction function.
  - Medium-term fiscal consolidation needed to put debt-to-GDP on a downward trajectory will itself exert additional downward pressure on the neutral real interest rate.
- Policy conclusion:
  - A comprehensive package—medium-term fiscal consolidation, bold structural reforms, and a more aggressive monetary policy reaction (including unconventional easing and strong forward guidance at the zero lower bound)—can overcome aging-related deflationary pressures and generate synergies: higher inflation expectations reduce real interest rates and stimulate capital formation; structural reforms raise permanent-income expectations and stimulate aggregate demand.
  - Structural measures targeting labor force participation by women and older workers and greater immigration are likely to be most effective at addressing aging’s structural headwinds.

*Source: _wp14139 - 1. Savings Rate for Different Age Groups (PDF).*

### 1. Savings Rate for Different Age Groups ...............................................................................

### _wp14139 - 1. Savings Rate for Different Age Groups ...............................................................................

### Section headings
- 1. Savings Rate for Different Age Groups ...............................................................................14
- 2. The Role of Demographic Factors in the Decline in Household Savings ...........................14

### Figures listed
- Figure 1. Changes in the Working-Age Population ..............................................................................3
- Figure 2. Aging and Expenditure Shares...............................................................................................5
- Figure 3. Effects of Aging and Macroeconomic Policies on Selected Macroeconomic Variables .....16
- Figure 4. Effects of Policies on Selected Macroeconomic Variables .................................................19

*Source: _wp14139 - 1. Savings Rate for Different Age Groups (PDF).*

### References .............................................................................................................

### _wp14139 - References .............................................................................................................

### I. Introduction
- Japan is aging rapidly: highest life expectancy in the world; working-age population started to decline around the early 1990s; the baby-boom generation (born in 1947–49) started retiring in 2007.
- Paper objectives (using the IMF’s Global Integrated Monetary and Fiscal (GIMF) model):
  - Under an unchanged monetary policy reaction function, quantify channels and effects through which population aging affects inflation and the neutral real interest rate.
  - Assess the extent to which life-cycle saving considerations neutralize the impact of aging on growth and inflation.
  - Analyze how fiscal consolidation interacts with aging effects on inflation.
  - Evaluate macroeconomic and structural policy responses to counter aging effects on the economy.

### II. Potential effects of aging on inflation (channels and literature)
- Key channels through which population aging could exert deflationary pressures:
  - Changes in relative prices (including land): shrinking/aging population lowers land prices; elderly consume less housing, transportation, communication, education and more medical and utilities (Figure 2).
  - Life-cycle savings and portfolio rebalancing: aging can shift aggregate portfolios toward safe assets, exerting downward pressure on government bond yields and affecting traded vs. nontraded goods prices.
  - Fiscal consolidation and excess supply: aging raises government outlays on pensions and health care while shrinking the tax base; expectations of higher risk premia and/or fiscal consolidation can cause output growth below potential and disinflationary pressures. For Japan, aging-related fiscal expenditure projections are relatively modest, so the fiscal channel is driven mainly by high initial debt and deficit levels.
  - Political economy and policy objectives: aging may alter societal preferences over inflation vs. real returns, potentially influencing central bank objectives; Bank of Japan’s recent adoption of a higher inflation target via aggressive QQE suggests political economy effects can be countered by policy.
- Selected empirical and theoretical findings cited:
  - Konishi and Ueda (2013): aging can be deflationary if caused by unexpected increases in longevity, inflationary if caused by declines in birth rate.
  - Ikeda and Saito (2012): decline in labor-force participation reduced the real interest rate in Japan; falling land prices amplify this under collateral constraints; total factor productivity is an important driver of real rate variation.
  - Lindh and Malmberg (1998, 2000): increases in population of net savers dampen inflation; younger retirees consuming pension claims can fan inflation.
  - Katagiri (2012): demand shifts from durables to services increase structural unemployment and reduce aggregate productivity growth, producing deflationary effects in Japan.

### III. Summary of the Global Integrated Monetary and Fiscal Model (GIMF)
- Model features:
  - Multicountry DSGE with optimizing households and firms; finite planning horizons and full intertemporal stock-flow accounting.
  - Frictions: sticky prices and wages, real adjustment costs, liquidity-constrained households; non-Ricardian OLG structure yields fiscal non-neutrality.
  - Asset markets incomplete: government debt held domestically; tradable international asset is U.S. dollar one-period bond.
  - Financial accelerator a la Bernanke, Gertler and Gilchrist (1999): external financing premium rises with indebtedness.
  - Multi-region: United States, euro area, Japan, emerging Asia (including China), Latin America, rest of world.
- Household sector:
  - Two household types: OLG with 20-year planning horizon; LIQ (liquidity-constrained) who consume current income (marginal propensity to consume = unity).
  - OLG households save via domestic government bonds, U.S. dollar bonds, fixed-term deposits.
  - OLG finite horizon implies temporary fiscal changes affect consumption; permanent government debt leads to crowding out via higher real interest rates.
- Production sector:
  - Firms produce tradable and nontradable intermediate goods; firms have finite horizons, face nominal rigidities and adjustment costs.
  - Land included as a fixed factor and source of wealth only for Japan.
- Financial sector:
  - Limited financial asset menu; banks intermediate deposits and loans; lending rate includes external financing premium; uncovered interest parity does not hold due to country risk premiums.
- International and policy features:
  - Explicit bilateral trade flows and exchange rates; international linkages driven by global saving and investment.
  - Fiscal policy uses various tax and spending instruments; a fiscal rule ensures long-run debt-to-GDP convergence but allows short-run countercyclical policy.
  - Monetary policy uses an inflation-forecast-based interest rate rule; the model endogenously reacts to inflation shocks.

### IV. Underlying pressures of aging on inflation (GIMF simulation inputs and results)
- Modeling constraints and calibration:
  - GIMF extended to include land for Japan; retirement decisions not explicit—declines in labor force participation imposed using U.N. demographic projections.
  - Decline in ratio of private savings to GDP assumed about 3.5 percentage points between 2012–40 (consistent with Hoshi and Ito (2012)): example from Hoshi and Ito where aggregate savings to GDP decline from about 2.8 percent in 2012 to about -1.3 percent in 2040.
  - The GIMF’s forward-looking rational expectations and central bank reaction imply monetary policy responds endogenously; “shadow” policy rate concept used (rate absent the zero-lower bound).
- Layered simulation scenarios and quantitative outcomes:
  - Labor force decline layer (blue line in Figure 3):
    - Labor force declines by roughly ¼ percent a year for 30 years (calibrated to UN median forecast for Japan’s working-age population).
    - Consequences: consumption and investment fall; falling labor supply raises real wages and reduces demand for capital and land; land prices fall; real effective exchange rate appreciates; increased imports; continuous downward pressure on inflation.
    - Monetary reaction: “shadow” policy rate reduces by about 20 basis points; inflation falls by about 10 basis points.
    - Public debt-to-GDP ratio rises gradually due to trend decline in nominal GDP.
  - Declining savings / dissaving layer (red line in Figure 3):
    - Japanese household savings rate decreased from around 15 percent of disposable income to around zero in 2011.
    - Demographic factors accounted for about 4 percentage points (one-third) of the decline in the aggregate savings rate (Table 2); aging subtracts about 0.1 to 0.2 percentage point from the savings rate each year—simulation uses the lower bound of this estimate.
    - Dissaving by the elderly results in repatriation of foreign savings, producing real exchange rate appreciation that more than offsets the inflationary demand effects from retirees’ consumption.
  - Rising sovereign risk premium layer (green line in Figure 3):
    - Scenario assumes risk premium rises by 5 basis points per year.
    - Effects: further output contraction, government debt-to-GDP rises further.
  - Combined effects (all three developments):
    - Combined impact raises public debt by 10 percent of GDP by 2030, relative to the baseline.
    - Lowers inflation by about 0.3 percentage points on average during 2013–30 despite a decline in the “shadow” policy rate of about 60 basis points on average during the same period.
- Additional empirical decomposition:
  - Using Iwaisako and Okada (2010) savings rates by age groups and IMF calculations: demographic factors accounted for about 4 percentage points of the decline; role of aging gained importance since 1998 (about 3 percentage points out of a 5 percentage point decline due to aging, with change in propensity to consume adding another 2 percentage points).

### V. Policy implications (simulations and prescriptions)
- Fiscal consolidation necessity and calibration:
  - Japan needs significant fiscal consolidation given high initial deficits and debt; simulation assumes an adjustment of 1 percent of GDP each year during 2016–25 over and above approved consumption tax increases in 2014 and 2015.
  - Composition of adjustment: consumption tax increases account for 66 percent of needed adjustment; lower public consumption accounts for 34 percent.
  - Effects of consolidation: avoids rise in risk premium but consumption and land prices decline markedly, exerting further downward pressure on the “shadow” policy rate and inflation; consolidation more than offsets decline in private savings, leading to further accumulation of net foreign assets.
  - Fiscal consolidation effects on neutral real rate exceed effects of population aging (including via real exchange rate).
- Complementary policies:
  - Need for bold structural reforms and more aggressive monetary policy reaction function to overcome deflationary pressures and maintain growth—central to “Abenomics.”
  - Simulation of policy package (red line in Figure 4):
    - Structural reforms assumed to raise potential growth by ¼ percentage point by 2015 and by ½ percentage point by 2018.
    - Aggressive monetary easing and effective forward guidance assumed to converge inflation expectations quickly toward a 2 percent inflation target.
    - Outcomes: such a package can offset aging’s deflationary effects, support growth and fiscal sustainability by raising inflation expectations (reducing real interest rate and stimulating investment) and modestly higher potential growth.
- Recommended structural measures that directly address population aging:
  - Stimulate female and older workers’ labor force participation.
  - Greater opportunities for immigration, particularly in areas with labor shortages.

### VI. Conclusions (summary of principal findings)
- Aging tends to exert deflationary pressures through relative price changes: falling labor force participation affects nominal wages and triggers adjustments in capital and land prices.
- For Japan specifically:
  - Dissaving by the elderly causes repatriation of foreign savings, leading to real exchange rate appreciation and net deflationary impact.
  - As private aggregate savings decline and government financing needs remain large, the sovereign risk premium may rise gradually, further reducing inflation and the “shadow” policy rate under an unchanged monetary reaction function.
  - Medium-term fiscal consolidation needed to put debt-to-GDP on a downward trajectory will itself exert additional downward pressure on the neutral real interest rate.
- Policy conclusion:
  - A comprehensive package—medium-term fiscal consolidation, bold structural reforms, and a more aggressive monetary policy reaction (including unconventional easing and strong forward guidance at the zero lower bound)—can overcome aging-related deflationary pressures and generate synergies: higher inflation expectations reduce real interest rates and stimulate capital formation; structural reforms raise permanent-income expectations and stimulate aggregate demand.
  - Structural measures targeting labor force participation by women and older workers and greater immigration are likely to be most effective at addressing aging’s structural headwinds.

*Source: _wp14139 - References .............................................................................................................*

### REFERENCES

### REFERENCES

### Cited works

- Anderson, D, B. Hunt, M. Kortelainen, M. Kumhof, D. Laxton, D. Muir, S. Mursula, and S. Snudden (2013), “Getting to Know GIMF: The Simulation Properties of the Global Integrated Monetary Fiscal Model”, IMF Working Paper Series, WP/13/55.
- Blanchard, O. (1985), “Debt, Deficits, and Finite Horizons”, Journal of Political Economy, Vol. 93, pp. 223–247.
- Bullard, J., C. Garriga, and C.J. Waller, 2012, “Demographics, Redistribution, and Optimal Inflation”, Presented at the 2012 BOJ-IMES Conference Demographic Changes and Macroeconomic Performance, Federal Reserve Bank of St. Louis.
- Braun, R.A., Ikeda, D., and D.H. Joines (2009), “The Saving Rate in Japan: why it has fallebn and why it will remain low”, International Economic Review, Vol. 50, pp. 291–321.
- Cashell, B.W. (2010), “A Separate Consumer Price Index for the Elderly?”, Congressional Research Service.
- Chen, Imrohoroglu, A., and S. Imrohoroglu (2007), “The Japanese Saving Rate Between 1960 and 2000: productivity, policy changes, and demographics”, Economic Theory, Vol. 32, pp. 87–104.
- Coenen, G., C. Erceg, C. Freedman, D. Furceri, M. Kumhof, R. Lalonde, D. Laxton, J. Lindé, A. Mourougane, D. Muir, S. Mursula, J. Roberts, W. Roeger, C. de Resende, S. Snudden, M. Trabandt, J. in‘t Veld (2010), “Effects of Fiscal Stimulus in Structural Models,” IMF Working Paper Series, WP/10/73, available at http://www.imf.org/external/pubs/cat/longres.cfm?sk=23671.0.
- Hoshi, T. and T. Ito, 2012, “Defying Gravity: How Long Will Japanese Government Bond Prices Remain High?”, NBER Working Paper Series, WP 18287, August.
- Ikeda, D. and M. Saito, 2012, “The Effects of Demographic Changes on the Real Interest Rate in Japan”, Bank of Japan Working Paper Series No. 12-E-3.
- International Monetary Fund (2013), “Japan: 2013 Article IV Consultation”, IMF Country Report No. 13/253, available at www.imf.org/external/pubs/ft/scr/2013/cr13253.pdf .
- International Monetary Fund (2013), “Japan: Selected Issues”, available at http://www.imf.org/external/pubs/ft/scr/2013/cr13254.pdf
- International Monetary Fund (2014), “World Economic Outlook”, available at: http://www.imf.org/external/pubs/ft/weo/2014/01/.
- Ito, T. and F.S. Mishkin (2004), “Two Decades of Japanese Monetary Policy and the Deflation problem”, NBER Working Paper No. 10878.
- Iwaisako, T. and K. Okada (2010): “Understanding the Decline in Japan's Saving Rate in the New Millennium”, PRI Discussion Paper Series No 10A-06, August 2010
- Kashiwase, K., M. Nozaki, and I. Saito, 2014, “Health Spending in Japan: Macro-Fiscal Implications and Reform Options”, IMF Working Paper, forthcoming.
- Katagiri, M. (2012), “Economic Consequences of Population Aging in Japan: effects through changes in demand structure”, Institute for Monetary and Economic Studies Discussion Paper No. 2012-E-3.
- Konishi, H. and K. Ueda (2013), “Aging and Deflation from a Fiscal perspective”, IMES Discussion Paper Series 2013-E-13.
- Kumhof, M., D. Laxton, D. Muir and S. Mursula (2010), “The Global Integrated Monetary Fiscal Model (GIMF) – Theoretical Structure”, IMF Working Paper Series, WP/10/34, available at http://www.imf.org/external/pubs/cat/longres.cfm?sk=23615.0.
- Lindh, T. and B. Malmberg (1998), “Age Structure and Inflation—A Wicksellian Interpretation of the OECD Data”, Journal of Economic Behavior and Organization, Vol. 36, pp. 19–37.
- Lindh, T. and B. Malmberg (2000), “Can Age Structure Forecast Inflation Trends”, Journal of Economics and Business, Vol. 52, pp. 31–49.
- Miles, D. (1999), “Modelling the Impact of Demographic Change Upon the Economy”, The Economic Journal, Vol. 109, pp. 1–36.
- Moghadam, R., R. Teja, P. Berkmen (2014), “Euro Area—“Deflation” Versus “Lowflation”, IMF Direct Bog available at: http://blog-imfdirect.imf.org/2014/03/04/euro-area-deflation-versus-lowflation/.

*Source: _wp14139 - REFERENCES*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14139.pdf_