Trade Balance and Need of National Reserves in Face with Aging Population

This chapter analyses the impacts of various policies on household consumption in face with unexpected longevity. An overlapping generational model with three sectors: household, production sector, and government, are constructed. This paper shows if the population is aging and unexpected longevity will keep on rising, taxing the young to support the old population, consumption will significantly decrease. If the countries have accumulated national reserve, either comes from the current account surplus or the national savings surplus, then the welfare of young and old generations will be improved significantly compared to the case of tax finance. All the existing models assuming constant population growth without unexpected longevity show that current account balance is important. However, many developing countries such as India, Indonesia, Thailand, and Vietnam are facing an aging population in the future. In those cases of ageing countries with unexpected longevity, national savings either comes from current account surplus or national savings surplus, are needed in order to improve the welfare of society. Secondly, if the population is young and a high population growth rate is expected, the countries can have a slight trade deficit which can be compensated for in the future. Thirdly, the reserve is not necessarily needed forever. The RES can be kept temporarily when the elderly can postpone their retirement age being paid by productivity-based wage rate. If the retirement age can be postponed, the old people can keep on working. In this model, everybody will become the working population, which reduces the tax burden of the working population and lead to higher consumption of young people. The old people will not rely on social security but their wage rate by keep on working in the society. Old people can also consume more. In that context, the total welfare of the economy will be higher. This chapter has an important implication to emerging economies such as India, Vietnam, Thailand, and Indonesia. They should change their retirement policy to make people work even in old age being paid by productivity-based wage rate rather than rely on seniority-based wage rate system. Accumulation of reserves, while the population is young, will make the welfare of the countries higher even facing the future aging population.