Savings Models and the Demographic Dividend

Joshua K. Wilde, Max Planck Institute for Demographic Research (MPIDR)
Mahesh Karra, Boston University

In the demographic dividend literature, a large proportion of the theoretical benefit to reducing fertility rates comes from increased savings by families with fewer children, leading to higher investment and increased formation of productive capital. However, conflicting evidence on the magnitude of the effect of reduced fertility on savings rates, in addition to a range of models on how those savings translate into investment, means the importance of this major theoretical channel is unclear. In this paper, we use a recent macrosimulation model from Canning, Karra, and Wilde (2017) to estimate the overall effect of savings under different, commonly used savings and investment assumptions. We find that changes in savings only contributes greatly to the demographic dividend under few and often unrealistic model assumptions, meaning that caution is warranted when using this channel as a rationale for promoting fertility decline.