Demography, Pensions and Welfare: Fertility Shocks and the Finnish Economy

Abstract

The economic effects of an ageing population are preoccupying policy-makers in most industrial countries. In this paper, we study the economic impact of the demographic shock in Finland, a country for which the post-war fertility shock was particularly large. The framework for our analysis is an overlapping generations simulation model parametrised to mimic the current state of the Finnish economy. We conclude that the impact of the demographic shock on capital formation, labour supply and output are considerable. Welfare effects are smaller and the fiscal pressure from higher pension expenditures easier to accomodate than suggested by many commentators. Nevertheless, different approaches to financing increased social security expenditures can have quite large effects on the welfare of certain generations. The difference between the best and the worst policy may amount to 2% of lifetime endowment for some households.