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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 [email protected]