The aging tax on potential growth in Asia

Population aging is becoming a prominent issue in Asia, especially for developing countries where demographic changes have asserted a downward pressure on the rate of growth. This paper refers to such potential unwanted effects as an aging taxand analytically examines them from a neoclassical perspective, using a Diamond-type overlapping generations model with endogenous retirement, survival rate, and old-age productivity. Based on this setup, negative impacts exist if too many old workers that are sufficiently unproductive choose to defer retirement under the aging pressure, which drains resources from future generations. Numerical simulations show that an aging tax can reduce the potential per capita growth rate (technology-adjusted) by up to 0.12 percentage points annually for some countries in Asia. Our results highlight that countries with sufficiently large labor shares (due to a high ratio of self-employment or a manual labor-centric production) and inadequate educational attainment are potentially the most sensitive and vulnerable to population aging.

Automated summary

Population aging is a prominent issue in Asia, particularly for developing countries. This paper examines the potential negative effects of population aging from an economic perspective, using an overlapping generations model. The results show that an aging tax can significantly reduce the per capita growth rate.