fect rates of return. The increasing globalization of world capital markets requires a focus on how global population aging will affect the global supply and demand for savings and the rate of return available to savers (see Box 8-1 for basic terminology used in this chapter). The committee begins by presenting a general framework that highlights the various ways by which global population aging may affect rates of return. Because other factor inputs, notably labor input, also affect asset returns, the committee also explores how changing population age structure may affect labor supply and the decisions of young households with regard to human capital acquisition. Rising investment in human capital by younger workers can potentially offset some of the rate of return consequences associated with population aging, since the effective labor supply from a small cohort of highly skilled workers can be comparable to that from a larger cohort of less-skilled workers. In evaluating how population aging may affect rates of return, the committee draws on empirical studies that have compared rates of return in the United States and other nations to various measures of demographic structure as well as on findings from simulation models that have been calibrated to reflect central attributes of the U.S. and the global economy.

Demographic structure is only one of many influences on prospective rates of return. While the committee does not attempt to evaluate all the other forces that may affect such returns, it does note that the large fis-

BOX 8-1

Throughout this chapter, a standard practice is followed and “savings” is used to denote a stock and “saving” to denote a flow. The stock of savings refers to the total amount of accumulated net assets that households, companies, and governments hold. The amount of saving in a given period, a flow, denotes the difference between income and consumption; the saving rate is the ratio of the flow of saving to the flow of income. An increase in the saving rate increases the supply of savings; an increase in desired consumption or investment increases the demand for savings. “Assets” can refer to any store of value, including physical assets such as land or plant and equipment, intangible assets such as patents, and financial assets that represent claims on the cash flows paid by companies, governments, or households. “Capital” here is used to denote the subset of assets that are used to produce goods and services. The capital-labor ratio, a common measure of the factor intensity of an economy, equals the ratio of the capital that is used in production to the amount of labor used in production. Labor in this context is a weighted sum, with the number of hours of labor input from different workers weighted by the workers’ skill level.

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