Government expenditure composition and long-run economic growth in the aging democracy

This paper examines how population aging affects government expenditure composition, economic growth, and social welfare in democratic societies, using an overlapping generations model. In aging societies, where public investment and welfare expenditures are financed through income taxes, intergenerational conflicts persist. Retired generations (i.e., elderly citizens) favor higher income tax rates to increase current welfare expenditures, often at the expense of public investment. In contrast, working generations (i.e., young citizens) prefer greater public investment but oppose higher income taxes. As the population ages, the political power of elderly citizens strengthens, leading to higher taxes and a reallocation of budgets from public investment toward current welfare. Consequently, population aging under democracy tends to undermine both economic growth and social welfare. However, when aging results from increased longevity, it can enhance capital accumulation, as individuals save more for retirement. Moreover, longer life expectancy brings survival benefits to both young and old generations, enabling them to enjoy retirement and reap the returns from public investment. Thus, population aging also has direct positive effects on growth and welfare. Numerical analysis reveals an inverted U-shaped relationship between population aging, economic growth, and social welfare if the elasticity of elderly citizens’ political power with respect to population aging is sufficiently high.