Demographic Trends, Asset Prices and Capital Accumulation

Department: Finance

Speaker: Francisco Gomes (LBS)

Room: T027

Demographic Trends, Asset Prices and Capital Accumulation

Abstract:

Most economies are currently experiencing simultaneous declines in fertility rates and increases in life
expectancy. We study the implications of these demographic trends for asset prices and capital accumulation.
We show that the conclusions depend crucially on how both defined benefit (DB) pension schemes
and social security (SS) will adjust to these changes. If we assume that both DB and SS retirement
replacement ratios remain unchanged, the riskfree rate, equity premium and capital stock all decrease.
However, if the DB schemes are replaced by defined contribution systems, a trend observed in several
countries, the riskfree rate will actually increase while the reductions in the capital stock and equity
premium are twice as large. Interestingly, capital accumulation initially increases as agents save more
for retirement, but eventually falls as we converge to the new demographic structure. Increasing the
retirement age, by contrast, leads to a more modest reduction in the capital stock and the equity premium,
and only a small increase in the risk-free rate.