Are demographic developments undermining intergenerational compacts?

Torben M. Andersen

doi:10.1007/s00148-025-01138-8

Return

Are demographic developments undermining intergenerational compacts?

2025-11-12

PRE

Torben M. Andersen *

DOI：10.1007/s00148-025-01138-8

Original

Original request for help

Save

Abstract

En 中文

Intergenerational compacts of the pay-as-you-go type provide scope for interactions between overlapping generations. Spurred by demographic changes, the desirability of the compact, not least the pension part, has been questioned. Importantly, the compact comprises not only the well-known backward or implicit savings part for the old (pensions and health care) but also a forward or implicit borrowing part for the young (education). The forward part has an implicit borrowing rate, and the backward part has an implicit savings rate, and both should be considered when assessing the attractiveness of the compact. This paper explains and quantifies these two implicit rates of return and shows how they depend on demographics using data for the United States and Denmark as representative of demographic trends in high-income countries. The implicit savings rate displays a downward trend, but so does the implicit borrowing rate, and it is systematically lower than the savings rate. Hence, while the backward part of the compact is challenged, the forward contract has become more attractive, and the entire compact remains attractive despite ongoing demographic trends.

Keywords:

Intergenerational compact

Overlapping generations

Demographics

Welfare state