Generational Economics in a Changing World

Abstract

Across the developed world, generous welfare state programs for the elderly, together with projected doublings or more in the proportion old, have led to political struggles that sometimes pit younger generations against the elderly. The goal of this chapter is to put the current situation in historical and institutional context. We begin with a brief review of research on hunter-gatherer groups, and then turn to substantive results for modern-day countries at different stages of economic development drawn from the National Transfer Accounts project, a large international collaboration. Human hunter-gatherer offspring have an exceptionally long period of immaturity and nutritional dependency, lasting until around age 20 years, judging by studies of contemporary groups (Kaplan 1994; Hill and Hurtado 2009; Howell 2010). Adults at all ages up to around 70 years produced more calories than they consumed on average, contributing their surplus to feed the young. The modern demographic transition began many thousands of years after hunting and gathering had been displaced by agriculture as the dominant form of production technology and social organization. The demographic transition eventually led to a much-reduced proportion of children in the population and a very much increased proportion of elderly. Given the intergenerational transfer patterns of hunter-gatherers just described, including the net productivity of the elderly, one would have expected that population aging would relax the social budget constraint, as the ratio of adults to children soared. But a funny thing happened along the way: societies invented retirement, older people became increasingly dependent on younger adults, and the economic consequences of population aging are now viewed with alarm. We explore the interaction of the transition’s changing population age distributions with the changing organization of the economic life cycle and with differing institutional arrangements. We draw on estimates by 23 country teams participating in the National Transfer Accounts project. (The researchers are identified and more detailed information is available for many countries in working papers on the NTA website: «www.ntaccounts.org».) We show that the direction of intergenerational transfers in the population has shifted from downward to upward, at least in a few leading rich nations. This sea change has resulted in part from the changing economic role of the elderly, which is closely tied to the rise of the welfare state and the increasing importance of assets, and in part from population aging brought about by the demographic transition. Despite the change in the net direction of resource flows, investment in health and education per child has risen relative to incomes, in association with fertility decline. The degree to which these changes have occurred varies across levels of economic development, broad regions of the world, and the idiosyncratic institutions of particular countries. It is well known, however, that the systems of public transfers to the elderly as currently structured will not be fiscally sustainable as populations continue to age rapidly in the first half of the twenty-first century. Structural reforms will occur and in some cases have already been made, and the outcome is likely to be a reversal in the trend toward earlier retirement and related changes.