Age Effects in Work and Consumption

Keyfitz, N. (1983). Age Effects in Work and Consumption. IIASA Working Paper. IIASA, Laxenburg, Austria: WP-83-017

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Abstract

The consequences of the extensive changes in age distribution now occurring in developed countries are different according to whether one considers aspects of production or consumption. Too little attention has been given to the former, especially in relation to the pace of technical change. This paper opens up that subject. Under fixed technology, experience is an asset to the individual and to the economy; under rapid change, experience can be a handicap to both. It is also shown how fewer entrants into the labor force makes for higher starting wages but slower promotion to more responsible work.

Of the various consumption and redistribution aspects, social security is the most conspicuous. An earlier paper (Keyfitz, 1981) developed formulas for the implicit reserve of a social security scheme; here we carry these further in relation to social security wealth. The crisis in social security consists in the fact that schemes have been priced lower than sheer arithmetic shows to be their long-term cost. Because the public believed the costs to be lower than it now realizes they are, it bought a larger quantity than it really wanted. Yet it is reluctant to reduce the quantity--by raising the retirement age or lowering the replacement ratio--because the scheme seems so fragile that any tampering with it could be the opening wedge to total dismantling. We locate social security in the framework of intergenerational transfers, whose problems arise as a direct consequence of birth fluctuations. Lines of argument converge to show that the solidarity of the generations is strengthened by at least partial funding of social security.

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