Population ageing: The consequences of a decrease in generation size are not at all the same as the consequences of increasing life expectancy

Population ageing can take two forms: A decrease in generation size (due to the decrease in the number of births in particular); An increased lifespan. For both cases, we will look at the theoretical effects of population ageing before it takes place (when it is anticipated) and once it takes place, by using the example of France: If there is a decrease in generation size, the smaller generation will benefit from a high per capita capital, bequeathed by the larger generation (which needs more capital since there are more jobs), and will therefore have high wages. The previous large generation has accumulated a lot of capital, especially since it is saving to protect itself against the decrease in the generosity of pay-as-you-go pensions; high per capita capital also leads to low real interest rates; if there is a longer lifespan, there is no effect through capital accumulation according to the number of employees; if the tax burden is unchanged, the level of pay-as-you-go pensions (per year of retirement) decreases, leading the last large generation to save more. In the first case (decrease in generation size), the first small generation benefiting from higher wages (since per capita capital is higher) can more easily accept an increase in the tax burden to improve the large generation’s pensions. In the second case (increased lifespan), this stabilising mechanism does not appear, and it is unlikely that the small generation will accept an increase in the tax burden .