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

by Charles Goodhart

Some assume that forward-looking households will consume less with an eye on their pension plans. Papetti (2019) argues that: [with] perfect foresight, the representative household realizes that the growth rate of the number of effective workers in support of the number of total consumers (the population size) is shrinking over time. Therefore, with the goal of smoothing consumption per capita into the future and depending on the pension scheme in place, the representative household anticipates this change with a willingness of consuming less and saving more, i.e. becoming more patient thus decreasing the real interest rate, everything else being equal.3 This has patently not happened in most AEs in recent decades, for several obvious reasons, e.g. myopia and a failure of imagination. People do not save adequately to smooth out their consumption over their expected life