cal deficits projected for the United States and other developed countries, which in turn are substantially affected by population aging, could play a significant role. These deficits will raise government liabilities and absorb savings that would otherwise be invested in productive capacity, leaving the economy with slower growth and fewer resources to support an older population. One consequence of the government-induced increase in the demand for savings could be higher rates of return. As is noted elsewhere, the lack of a credible strategy and its timely implementation for reducing projected deficits raises the risk of investors losing confidence in U.S. Treasury debt, which could lead to a rise in interest rates and a decline in the value of Treasury bonds.

HOW DEMOGRAPHIC CHANGE AFFECTS EXPECTED
RATES OF RETURN: A FRAMEWORK

The balance between the supply of savings and the demand for savings determines the rate of return earned by investors. Households, businesses, and governments that accumulate savings hold financial claims such as bank deposits, corporate and government bonds, stocks, and deeds to houses and other real estate. Other households, businesses, and governments may demand savings to deploy in financing investment, personal consumption, or government consumption. They may issue financial claims, such as corporate bonds, to the suppliers of savers when they deploy these savings. An increase in the supply of savings lowers the expected rate of return to savers, whereas an increase in the demand for savings increases the return that savers can expect to earn. The decisions of savers about what share of current output to save each year, together with the value of savings that have been accumulated in past years, determine the aggregate supply of savings. The demand for savings, in turn, is determined by company decisions about how much capital to use in the production process, by government borrowing needs, and by household demand for credit.

An aging population can affect both the supply of and the demand for savings, and there are potentially countervailing effects. This makes it difficult to provide a clear-cut answer to the question, Are asset returns more likely to rise or to fall as a consequence of population aging? The committee concludes that the net effects of population aging on rates of return are likely to be modest.

This analysis is generally set in a framework in which global asset markets operate as an integrated whole, which means that assets can migrate freely to wherever they are expected to earn the highest rate of return. Migration of assets tends to equalize expected returns internationally: The global supply and demand for assets determines expected returns. This is



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