NBER WORKING PAPER SERIES

DEMOGRAPHIC FLUCTUATIONS, GENERATIONAL WELFARE ANDINTERGENERATIONAL TRANSFERS

Alwyn Young

Working Paper 8530http://www.nber.org/papers/w8530

NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts Avenue

Cambridge, MA 02138October 2001

I am grateful to Mark Aguiar, Elhanan Helpman, Ho Veng-Si, Chad Jones and my colleagues at the CIARfor many useful comments and conversations. This research was supported by the Canadian Institute forAdvanced Research. The views expressed herein are those of the author and not necessarily those of theNational Bureau of Economic Research.

© 2001 by Alwyn Young. All rights reserved. Short sections of text, not to exceed two paragraphs, may bequoted without explicit permission provided that full credit, including © notice, is given to the source.

Demographic Fluctuations, Generational Welfare and Intergenerational TransfersAlwyn YoungNBER Working Paper No. 8530October 2001

ABSTRACT

This paper extends the Ramsey model's normative analysis to issues of generational welfare and

intergenerational transfers. A planner, who maximizes the discounted welfare of an endless stream of

generations, is intrinsically biased against larger cohorts, which are more costly to provide utility.

Imperfect production substitutability produces a market bias against baby booms as well, lowering their

lifetime income. The market bias, however, tends to be greater than that of the planner, who provides

the baby boom cohort with more favourable lifetime transfers. Intuitively, the baby boom benefits from

temporarily reduced elderly dependency, allowing greater lifetime consumption relative to lifetime

income. Declining population growth leads to rising elderly dependency, which the planner supports with

increasing intergenerational transfers. Secularly rising social security taxes, and declining lifetime returns,

with a baby boom cohort receiving more favourable treatment than their heavily burdened successors,

are consistent with the wishes of a social planner in an environment with declining population growth.

Alwyn YoungGraduate School of BusinessUniversity of ChicagoChicago, IL 60637and NBERa-young2@uchicago.edu