The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival

by Charles Goodhart

If one should assume that tax rates will remain constant at present levels, then the massive rise in the numbers of the old would mean that the relative generosity of pensions would have to decrease sharply, partially balanced by increased savings rates from those of working age. We do not believe that this is the right assumption to make, though it lies behind the assumption of interest rates remaining low over future decades in several other related studies of long-run demographic outcomes. Instead, we think that a better assumption is that pensions will go up in real terms in line with the rate of growth of real GDP, with the implication that the tax burden arising from pensions will rise in line with the ratio of aged to the total population. There are several reasons why we prefer this assumption to that in which tax rates are held constant. First, the pensions of the aged have generally been protected despite the slow growth of real output in recent years. Second, the old represent a major voting bloc, and they are more likely to vote than the young. The rising share of elderly voters in the electorate will provide a potent constituency for keeping pensions rising in line with real output.