The economic consequences of ageing populations.

The effect of low birth rates and lengthening lives on the economy is discussed. Two extreme cases are examined: where pensions are entirely on a pay-as-you-go basis, and where they are entirely funded. It is argued that the economy would grow faster in the latter case. The impact on the levels of consumption of each age cohort during its lifetime is assessed. The possible magnitude of changes in consumption as a result of an increase in the retired part of the population is illustrated. It is shown that, comparing later cohorts to earlier cohorts, the former are better off under a funded system. An argument is then sketched showing that a pay-as-you-go system favours earlier cohorts too much; while most probably, but not certainly, a fully funded system favours the later cohorts excessively. It is claimed that a gradual introduction of partial funding, and some increase in the length of working lives, can deal with the effects of an ageing population without an excessive burden on any cohort or age-group.