ABSTRACT
Decades of increasing longevity and declining fertility worldwide have resulted in the ageing of populations. With fewer young workers per older retired individual and a rapidly rising number of long-lived elderly persons, governments will likely face sharply increasing pension and healthcare spending obligations over the coming years. Forecasting the extent and timing of these obligations is essential so that policy choices regarding these issues can proceed on an informed basis. In this chapter, I survey three different approaches that modelers have adopted for this task. An accounting/macroeconomic approach decomposes the outcome of interest—health or pension spending, for instance—into economically meaningful components. The decomposition typically features objects like the old-age dependency ratio, labor force participation rates, and other important economic and demographic variables readily available from the macroeconomic literature. The second, a microsimulation approach, constructs a detailed model of the evolution of the population’s health over time. The approach’s data needs are substantial, requiring high-quality longitudinal data with a detailed health questionnaire to populate its parameters. The third, an overlapping generations/microeconomic approach, maps anticipated demographic changes in the population onto a neoclassical equilibrium model of consumption, savings, production, technology, and growth. I describe each approach, discuss strengths and weaknesses, discuss substantive results about the effects of population ageing on future fiscal prospects from papers that feature each approach, and conclude with suggestions for future work motivated by gaps (better modeling of healthcare suppliers and a focus on the effects of the COVID-19 pandemic) in this literature.
