Population ageing, public debt and sustainable fiscal policy

Due to rising life expectancy and declining fertility, the world’s population is ageing rapidly. Not only does the number of elderly relative to the number of working-age people increase, so does the proportion of the very old in the general population of the aged. In consequence, government spending on pensions, health care and other services provided for the aged is increasing and has been projected to rise on an even larger scale after the turn of the century. How can the old-age social expenditures be accommodated into a sustainable path for the general government budget?2 In most European countries, public outlays allocated to the elderly are financed on a pay-as-you-go (PAYG) basis, i.e. benefits paid to retired people are directly financed by contemporaneous taxes levied on workers. In periods with dramatic swings in the age structure, the tax rate is likely to swing as well. For example, when the population is ageing, the ratio of the number of persons of drawing age to that of those of contributing age increases, and PAYG financing implies an increase in the transfers from young to old. Does that cause generational conflicts, and will the PAYG scheme eventually be undermined?