Declining Fertility, Human Capital Investment, and Economic Sustainability

Abstract

<p>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 for smaller cohorts—are mostly ignored. We use a dynamic longitudinal microsimulation model to explore the extent to which investments in human capital could offset the adverse economic impact of low fertility. Our research context is Finland, the fastest aging European country and the site of dramatic fertility declines and stagnant educational 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 the 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 a viable strategy to maintain economic sustainability.<br></p>