Population in developed
countries has dramatically aged in recent years. At the same time, most of
these countries finance their old-age public pension benefits on a
pay-as-you-go (PAYGO) basis. Such a pension scheme combined with an ageing
population, represent a financial challenge for the governmental budgets.
Accordingly, several studies have been done on the effects of population
ageing. In the present paper, the purpose is to study how population ageing
will affect capital accumulation. A simple OLG model with PAYGO pension is
applied. The formulation of the model makes it possible to deduce an explicit
expression for this relation. It is shown that an increase in the elderly
dependency ratio will increase the long-run capital stock.
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