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  • https://doi.org/10.1111/roiw.70057Copy DOI Icon

Generational Connections, Population Aging, and Sustainable Consumption

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Abstract

ABSTRACT As their populations age, Japan, the United States, and many other countries face challenging economic prospects. Due to important intergenerational linkages, members of every generation will be affected. Saving may prove to be insufficient and old‐age support systems fiscally unsound. Here we assess the proportional reduction in consumption across all ages that would be required to attain long‐term sustainability. We use a simulation model together with the most extensive data ever compiled to analyze the connections between age structure and the economy. Our goal is to root our analysis in these rich empirical measures of age‐specific economic behavior which provide a straightforward interface with the population age distribution. This approach contrasts with more theoretical models incorporating feedbacks and endogenous behavior while requiring different kinds of assumptions. Sustainability requires both cross‐sectional aggregate balance each year and longitudinal balance for each birth cohort. Specifically, we ask: “Are the baseline age profiles of consumption, labor income, savings, and intergenerational transfers sustainable in a hypothetical demographic steady state that would result from fixed fertility and mortality rates? To what extent would the age profile of consumption have to be altered to achieve sustainability?” Sustainability is calculated for each country using conditions as of three dates: several decades ago (1984 Japan and 1990 US), 2019, and 2065. We find that the intergenerational economies in Japan and the US were close to sustainable at the earlier date, but became seriously unsustainable by 2019. An even greater shortfall would occur given expected fertility and mortality rates for 2065. We discuss reasons for the deterioration in sustainability—population aging, differences in economic behavior, and public policy. Given 2019 conditions long‐run sustainability in Japan would require a 15% reduction in consumption (relative to labor income with an underlying upward trajectory from expected productivity growth). With the projected fertility and mortality conditions of 2065, a 19% reduction would be required to achieve sustainability. For the US, the corresponding reductions would be 9% for 2019 and 12% for 2065 conditions.

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