## Demographics, Old-Age Transfers and the Current Account

_IMF Working Papers, December 7, 2018_

## Source details

**Canonical URL:** [Demographics, Old-Age Transfers and the Current Account](https://www.imf.org/en/publications/wp/issues/2018/12/07/demographics-old-age-transfers-and-the-current-account-46386)

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- [Structured JSON version](/en/publications/wp/issues/2018/12/07/demographics-old-age-transfers-and-the-current-account-46386/index.json)
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## Bibliographic details
- Authors: Mai Dao, Callum Jones
- Published: December 7, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484385906.001

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### Summary
- Paper authors: Mai Dao, Callum Jones.
- Publication date: December 7, 2018.
- Core focus: Reviews the relationship between demographics and long-run capital flows in both theory and in the data.
- Approach: Develops a two region overlapping generations model where countries differ in their population growth and mortality risk.
- Main finding (model): Population structure and life expectancy (which affects the need to save to meet old age consumption) affect current account levels.
- Main finding (transfers): Countries with more generous unfunded transfer schemes tend to have lower saving and more capital inflows over the long-run, although this effect may be dampened by natural limits (on taxation) of these schemes.
- Empirical support: The key predictions of the model are generally supported by a rich panel dataset.

### Model, mechanisms, and predictions
- Model type: two region overlapping generations (OLG) model.
- Cross-country differences modeled: population growth and mortality risk.
- Mechanism emphasized: life expectancy affects the need to save for old-age consumption, thereby influencing saving rates and current account levels.
- Role of transfer schemes:
  - Unfunded (pay-as-you-go) old-age transfer schemes reduce private saving incentives.
  - More generous unfunded transfer schemes are predicted to generate more capital inflows (i.e., lower current account balances), subject to constraints.
  - Dampening factor: natural limits on taxation that finance these schemes can limit the magnitude of the effect.

### Empirical analysis
- Data: A rich panel dataset is used to test model predictions.
- Result: The key predictions of the OLG model are generally supported by the panel evidence presented.

### Policy implications and considerations
- Demographic changes (population structure and life expectancy) should inform assessments of countries’ long-run saving behavior and current account positions.
- Design and sustainability of old-age transfer schemes matter for cross-border capital flows:
  - Generosity of unfunded schemes can lower national saving and increase capital inflows.
  - Fiscal and political constraints on taxation to finance unfunded schemes can limit these effects, implying trade-offs between intergenerational redistribution and external balance dynamics.

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## Content in this bundle

- **Demographics, Old-Age Transfers and the Current Account, WP/18/264, December 2018**
  - [Demographics, Old-Age Transfers and the Current Account, WP/18/264, December 2018 (Markdown version)](/-/media/files/publications/wp/2018/wp18264.pdf.md){rel="alternate" type="text/markdown"}
  - [Demographics, Old-Age Transfers and the Current Account, WP/18/264, December 2018 (PDF)](/-/media/files/publications/wp/2018/wp18264.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/wp/issues/2018/12/07/demographics-old-age-transfers-and-the-current-account-46386_