1 - Introduction
Published online by Cambridge University Press: 22 September 2009
Summary
It is a widely held perception that future population paths can be projected with a fairly high degree of certainty. For example, as an input to assessments of the future stance of public finances following population ageing, most countries now routinely report old-age dependency ratios and other demographic indicators. However, by concentrating on one (or a few) selected population path(s), this practice fails to recognize that population forecasts are, in fact, highly uncertain.
Uncertainty in demographics has traditionally been accounted for by considering ‘high’ and ‘low’ scenarios in addition to a ‘medium’ assumption. However, it has long been known that this approach has serious shortcomings. For example, the scenarios assume a perfect (positive or negative) correlation not only between the vital processes of fertility, mortality and migration but also across age and time for each vital process. Moreover, the method is intrinsically unable to assign probabilities to its ‘high–low’ ranges.
While the flaws associated with the traditional approach in themselves warrant an alternative approach, what matters from an economic perspective is the extent to which the application of stochastic forecasting techniques modifies outcomes obtained using traditional techniques. Despite the different methodologies used in the production of stochastic forecasts, it turns out as an empirical regularity that the level of uncertainty in demographic forecasts is much higher than generally believed. We would clearly expect this finding to translate into economic variables, by making the variability in health- and pension-related as well as in broader macroeconomic outcomes much larger than often recognized.
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- Uncertain Demographics and Fiscal Sustainability , pp. 1 - 8Publisher: Cambridge University PressPrint publication year: 2008