MPIDR Working Paper
Declining fertility, human capital investment, and economic sustainability
MPIDR Working Paper WP-2024-002, 49 pages.
Rostock, Max Planck Institute for Demographic Research (February 2024)
Future fertility is a key input when charting the sustainability of social security systems, and declining fertility is often expected to put pressure on economic indicators such as pension burden. Such expectations are based on a narrow view of the impact of fertility on the economy, focusing on age structure. Dynamic impacts – for instance, the potential for increased human capital of smaller cohorts – are mostly ignored. We use a dynamic longitudinal microsimulation model to explore to what extent investments in human capital could offset the adverse economic impact of low fertility. We implement our model in the Finnish context, which is a particularly interesting case as Finland is the fastest-ageing European country and experienced dramatic fertility declines and stagnant education levels in the 2020s. We find that an ambitious but simple human capital investment strategy that keeps the total investment constant despite declining cohort size, thereby increasing per-capita investment, can offset the negative impact of a smaller labor force on pension burden. Human capital investment not only reduces pension burden, but also increases working years, pension income, retirement years, and longevity. Policies focusing on human capital investment are likely to be a viable strategy to maintain economic sustainability.
Keywords: low fertility, human capital investment, economic sustainability, Finland, dynamic longitudinal microsimulation model