Winners and Losers from a Demographic Shock under Different Intergenerational Transfer Schemes

This study investigates the general equilibrium effects of a fertility shock under different intergenerational transfer schemes. The effects on lifetime income and utility for different generations, as well as the effects on factor prices, are analyzed in a three-period overlapping generations model where the workers provide for the young and the retired under different tax schemes. The economic effects of a fertility shock vary substantially with different intergenerational transfer schemes. How wages, interest rate and savings will evolve differs not only quantitatively but also qualitatively. To minimize the effects from a fertility shock it is vital that the effects on human capital are minimized. For a baby boom shock this implies that a higher fraction of output must be devoted to human capital accumulation, during the educational years of the baby boom generation. With respect to transfers to the old, the tax rate should not be fixed.