30
Michael Fertig and Christoph M. Schmidt
this argument. In consequence, whether subsequent, smaller cohorts will in-
deed experience relative economic prosperity because of their scarcity, is quite
uncertain.
The real problem for the smaller generations of the future are the
intergenerational linkages that characterize every society. From the vantage
point of aggregate welfare, it is the income per capita, not the income per
worker which is of central interest. Indeed, current generations of workers
have a vital interest in a high productivity of subsequent smaller generations -
otherwise it will be difficult to sustain prosperity growth for the population as
a whole, children, workers, and retirees alike. Needless to say, the informal,
intra-family and institutionalized, anonymous forms of redistributing labor in-
come lie at the heart of the issue. A high level of income taxes, for instance,
might ensure that the disproportionately high income of young workers is par-
tially translated into infrastructure and health services benefiting retirees.
The most direct way of intergenerational redistribution is the system provid-
ing old-age income security. In most European economies, it currently rests to
a large extent on a pay-as-you-go idea, re-distributing income perpetually
from the currently active generation to retirees, maintaining this principle
from generation to generation. These systems’ central parameter in times of
rapid demographic change is certainly the replacement rate. A high replace-
ment rate ties the income of retirees generously to the income of workers, ne-
cessitating this generation to contribute a larger chunk of their product to the
system when its population share is small. This is exactly the root of the cur-
rent political debate surrounding the pension system.
Yet, it has become clear in our discussion that the structure of labor market
outcomes is affected in a similar fashion by institutional arrangements. A
prime example is an age-earnings profile which historically is held stable
intertemporally by the employer associations and unions in their overall wage
bargain. More generally, a problem will typically arise whenever institutions
are put into place with the current age structure in mind. When these institu-
tions face different demographic circumstances, they are in danger of failing or
- with the same outcome - lose their consensus support. This principle holds
for systems of old-age security and labor market institutions alike.
Two types of - mutually non-exclusive - remedies can be employed to ward off
the demographic challenge. One avenue might be to tackle the demographic
change directly. A contentious and probably not extremely promising strategy
is the implementation of programs intending to foster fertility. They are usu-
ally not too promising, because the incentives serious enough to alter this key
decision in the lives of most adults would have to be quite generous. They are
contentious, since they address the voluntary decisions of people, after all. At
best, the desired alleviation of the demographic problems of social security