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Description
Abstract
Thanks to numerous empirical research studies, a general consensus has been reached on the effects of an aging population on the economy, particularly in terms of economic growth and savings. However, most of the previous research examines the effects of the aging on economically advanced countries. Furthermore, rarely have those studies used the time-series properties of the data. By applying two popular time-series statistical tools (multivariate cointegration analysis and vector error correction model) to Korean data, this paper finds: (1) There is a long-run equilibrium linkage among the aging, medical expenditure and savings; however (2) there is no Granger-causality present between aging and national savings in the short run in Korea. (JEL D12, J14)
Keywords: Aging, Savings, Cointegration Test, VECM, Granger-causality
Introduction
According to Modigliani's [1970] life-cycle theory, economic agents tend to engage in active saving while they are working and to begin to dissave (or a negative saving) when they retire (around age 65 or greater). Hence, aging will affect the national savings rate negatively, so there is a negative relationship between aging and savings in the economy. This theory has been confirmed so far in numerous empirical papers. Using data on the baby boomers, Cantor and Yuengert [1994] show those in this group save intensively while they are working (or before the retirement), as the numerous negative predictions about the social security program leave them concerned as to whether it will still be available to them. However, because as retirees they gradually begin to dissave more, savings is negatively affected by the aging population [Horioka, 1997; Heller and Symansky, 1998]. (1)
In contrast, others show the theory is not as precise in predicting retiree savings and consumption activities due to the rising concerns retirees have about the future. Papers such as Alessie et al. [1999] and Palumbo [1999] show retirees do not consume as much as predicted due to those uncertainty factors about the future. In their widely cited paper, Alessie et al. [1999] use Dutch data sets to argue the elderly do not dissave in the pattern predicted by the life-cycle theory due to precautionary savings, bequest motives and uncertain health issues. Hence, these factors will contribute to a slower dissavings than the theory predicts. In this case, there is only a weakly negative or no economically meaningful relationship present between the aging and savings.
As there is no robust consensus on the relationship between the aging and savings, it is worth re-visiting the issue. This paper does so by using different approaches from the extant studies and making use of the time-series properties of data. So far, there have been numerous studies that have worked on the effects of the aging on savings, but few studies have made use of the time-series properties of the data.
Adopting two popular time-series procedures (cointegration test and vector error correction model), this paper plans to identify: (1) If the aging and savings have any long-run relationships; and (2) if there is any Granger causality present between the two variables in the short run. (2) This paper adopts data from Korea for the following reasons. First, the country is experiencing the fastest aging economy among the OECD member countries.... |
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