https://www.economist.com/special-report/2025/10/13/fixing-the-welfare-state-looks-electorally-impossible
https://archive.is/vqhUg
Mention the phrase “the social contract” to a young French person and they might not think of Jean-Jacques Rousseau’s 1762 opus. They might think of a meme. It shows a young professional, “Nicolas”. He sits, head in hands, with arrows pointing from him to various drains on taxpayers, including “Bernard & Chantal, 70 ans”, who spend their pensions on cruises and cocktails. The image has spread elsewhere—in Britain retirees “Simon and Linda” extract cash from “Nick”. And it has entered the language of politicians. “It is always Nicolas who pays,” said Bruno Retailleau, France’s interior minister, in August. President Emmanuel Macron’s advisers are said to be “closely monitoring” the Nicolas qui paie“movement”.
Since the foundation of the welfare state its critics have warned that it would be captured and abused by coalitions with political power. Milton Friedman said in 1977 that an all-powerful middle class would “obtain benefits for themselves at the expense of both the very rich and the very poor”. He was wrong. Instead, a coalition of the old and those sympathetic to them attempt to extract cash from Nicolas.
The ageing of populations has utterly reshaped the composition of government spending (see chart 1). Welfare states still support the poor. Even sink-or-swim America provides transfers to the bottom quintile that are worth 90% of their pre-tax incomes. But since 1980 transfers to the elderly and spending on health care—which is overwhelmingly concentrated on them—have grown by about 5% of GDP in the OECD group of rich countries, twice the rise in other social spending. Advanced economies in the G20 will, on their current trajectories, spend another 2.4% of GDP more annually on pensions and health care by 2030 than in 2023, according to the IMF.
The ageing of populations has reshaped government spending
Even as societies have aged, employment in developed economies has risen slightly since 2000 as a share of the total population, economists at Goldman Sachs found in a paper this year. As life expectancy at birth has grown from 78 to 82 years, the median effective working life has gone up from 34 to 38 years. Thus ageing societies have in recent years wound up with more workers for every dependant, not fewer.
And older people are getting more productive. A person who was 70 in 2022 had the cognitive ability of a 53-year-old in 2000, according to data crunched by the IMF. The improvement among the over-50s is so large that, using the relationship between brainpower and income, it implies a rise in average earnings of 30% among those with jobs. The trend towards “healthy ageing” is sufficient to add 0.4 percentage points to forecast annual global growth between 2025 and 2050, reducing the overall negative effect of ageing by about a third. “Demographics is not destiny,” argues Joseph Davis of Vanguard, an asset manager, having modelled how ageing has affected American growth since 1890.
Rising healthy longevity helps with another feared problem: the global fall in fertility. The average rate of fertility needed for births to keep up with deaths is thought to be 2.1 children per woman. But if life expectancy rises at a pace of 0.25 years per year—the historical pattern in the rich world—the replacement fertility rate drops to just 1.6-1.7, calculate Goldman’s economists. That means many rich countries would have seen their populations grow in recent decades even if there had been no immigration.
The last bit of good news is that an older population should mean lower real interest rates. Older people, having built up assets during their working lives, run them down slowly; their vast portfolios provide a plentiful supply of capital. Adrien Auclert of Stanford University and colleagues project in a working paper that ageing populations will reduce global real interest rates by over one percentage point, all else being equal, by 2100. Another paper by an overlapping group of authors finds that the fiscal effect of lower rates from an ageing population could allow America’s debt-to-GDP ratio to sustainably rise to 250% by 2100.
Why, then, is ageing a fiscal problem nonetheless? The answer is like Friedman’s: the old have political power. They can resist changes to the structure of the welfare state, and thus enjoy the advantages enumerated above while retaining benefits defined when old age was shorter and grimmer. At their inception, public pensions in Britain and Germany offered meagre support to those over 70 when life expectancy was 45-50. But as life expectancy shot up, the age at which public pensions could be claimed did not keep pace. Between 1972 and 2000 the proportion of life a man in the OECD could expect to spend in retirement grew from a sixth to about a quarter. Since then governments have made efforts to raise retirement ages in line with increases in longevity, but it is fiddling around the edges compared with the decades-long trend. And now there are many more pensioners both claiming their incomes and voting to preserve them.
Pensions are popular with the young as much as the old
Proposals to make even minor changes to pension benefits have provoked furious protests in backlash. In 2023 more than 1m French marched against a gradual increase in the retirement age from 62 to 64; the reform was pushed through using special constitutional powers. Italy has watered down retirement reforms that were legislated for in 2011. Britain’s Labour government announced in 2024 that it would means-test the “winter fuel allowance”—a £300 ($405) annual universal handout that for most recipients has little to do with heating. It was forced to all but U-turn on the proposal. As populations have aged, politics seems to have become more of a bidding war: analysing the manifestos of political parties in 65 countries, IMF researchers have found that both left-wing and right-wing parties have become markedly more expansionist in their promises since about 1990 (see chart 2). Shifts in political rhetoric towards expansionism tend to be followed by bigger deficits.
Where does this leave Nicolas? The direction of the welfare state provides some support for the meme. But it misses two phenomena. The first is that pensions are popular with the young as much as the old. Four in five Americans told Pew, a pollster, in 2024 that social-security benefits should not be reduced in any way, a view broadly shared across demographic groups. A majority of Brits aged 25-49 think the government should definitely or probably keep the triple lock, a guarantee that the country’s state pension rises by earnings, inflation, or 2.5%, whichever is highest, and which over time guarantees that pensions rise relative to wages. Nicolas, it seems, wants his granny to have a nice life—and to enjoy a comfortable retirement himself. The elderly have a lock on welfare states not just because they are a large voting bloc, but because they are sympathetic recipients.
The second omission is that taxes on Nicolas have not risen to anything like the extent that would be necessary to pay for the old—which is why so many governments are running up big debts instead. In both Europe and America, the total tax wedge, or difference between a worker’s take-home pay and what it costs to employ them, is lower today on average than it was in 2000 for an individual earning 167% of the median wage. Even in France and Britain, the increase in the tax wedge is up by less than 2 percentage points.
But Nicolas does have a problem. If governments decide to stave off fiscal crises by balancing budgets, he is the likeliest target. Although the balance of evidence is that belt-tightening is easier on the economy when spending is cut rather than taxes raised, the politics of a greying society make that difficult. The rest of the state has already been squeezed to make room for pensions and health care, and from Italy’s local government reforms to Britain’s pot-holes economists have linked the deterioration of public services to more votes for right-wing populist parties, which incumbents are trying to fight off. Taxes, especially on higher earners, will have to rise instead. That is, unless a more convenient way out of debt is found—a possibility that the next chapter examines. ■
More from this Special Report
https://archive.is/vqhUg
Mention the phrase “the social contract” to a young French person and they might not think of Jean-Jacques Rousseau’s 1762 opus. They might think of a meme. It shows a young professional, “Nicolas”. He sits, head in hands, with arrows pointing from him to various drains on taxpayers, including “Bernard & Chantal, 70 ans”, who spend their pensions on cruises and cocktails. The image has spread elsewhere—in Britain retirees “Simon and Linda” extract cash from “Nick”. And it has entered the language of politicians. “It is always Nicolas who pays,” said Bruno Retailleau, France’s interior minister, in August. President Emmanuel Macron’s advisers are said to be “closely monitoring” the Nicolas qui paie“movement”.
Since the foundation of the welfare state its critics have warned that it would be captured and abused by coalitions with political power. Milton Friedman said in 1977 that an all-powerful middle class would “obtain benefits for themselves at the expense of both the very rich and the very poor”. He was wrong. Instead, a coalition of the old and those sympathetic to them attempt to extract cash from Nicolas.
The ageing of populations has utterly reshaped the composition of government spending (see chart 1). Welfare states still support the poor. Even sink-or-swim America provides transfers to the bottom quintile that are worth 90% of their pre-tax incomes. But since 1980 transfers to the elderly and spending on health care—which is overwhelmingly concentrated on them—have grown by about 5% of GDP in the OECD group of rich countries, twice the rise in other social spending. Advanced economies in the G20 will, on their current trajectories, spend another 2.4% of GDP more annually on pensions and health care by 2030 than in 2023, according to the IMF.
Old whine, new models
Some view this growing transfer of resources as inevitable. The state is a veil, it is argued; specific policy choices cannot change the fact that as the ratio of retirees to workers rises, the elderly have to be supported somehow. Yet economists are beginning to entertain the idea that an ageing population need not be too much of a fundamental economic drag. That is because older people work more and more productively than they used to, live longer, and hoard wealth.The ageing of populations has reshaped government spending
Even as societies have aged, employment in developed economies has risen slightly since 2000 as a share of the total population, economists at Goldman Sachs found in a paper this year. As life expectancy at birth has grown from 78 to 82 years, the median effective working life has gone up from 34 to 38 years. Thus ageing societies have in recent years wound up with more workers for every dependant, not fewer.
And older people are getting more productive. A person who was 70 in 2022 had the cognitive ability of a 53-year-old in 2000, according to data crunched by the IMF. The improvement among the over-50s is so large that, using the relationship between brainpower and income, it implies a rise in average earnings of 30% among those with jobs. The trend towards “healthy ageing” is sufficient to add 0.4 percentage points to forecast annual global growth between 2025 and 2050, reducing the overall negative effect of ageing by about a third. “Demographics is not destiny,” argues Joseph Davis of Vanguard, an asset manager, having modelled how ageing has affected American growth since 1890.
Rising healthy longevity helps with another feared problem: the global fall in fertility. The average rate of fertility needed for births to keep up with deaths is thought to be 2.1 children per woman. But if life expectancy rises at a pace of 0.25 years per year—the historical pattern in the rich world—the replacement fertility rate drops to just 1.6-1.7, calculate Goldman’s economists. That means many rich countries would have seen their populations grow in recent decades even if there had been no immigration.
The last bit of good news is that an older population should mean lower real interest rates. Older people, having built up assets during their working lives, run them down slowly; their vast portfolios provide a plentiful supply of capital. Adrien Auclert of Stanford University and colleagues project in a working paper that ageing populations will reduce global real interest rates by over one percentage point, all else being equal, by 2100. Another paper by an overlapping group of authors finds that the fiscal effect of lower rates from an ageing population could allow America’s debt-to-GDP ratio to sustainably rise to 250% by 2100.
Why, then, is ageing a fiscal problem nonetheless? The answer is like Friedman’s: the old have political power. They can resist changes to the structure of the welfare state, and thus enjoy the advantages enumerated above while retaining benefits defined when old age was shorter and grimmer. At their inception, public pensions in Britain and Germany offered meagre support to those over 70 when life expectancy was 45-50. But as life expectancy shot up, the age at which public pensions could be claimed did not keep pace. Between 1972 and 2000 the proportion of life a man in the OECD could expect to spend in retirement grew from a sixth to about a quarter. Since then governments have made efforts to raise retirement ages in line with increases in longevity, but it is fiddling around the edges compared with the decades-long trend. And now there are many more pensioners both claiming their incomes and voting to preserve them.
The long goodbye
The average male retirement is 18 years long. That will rise in future decades, according to the OECD. Some countries, including Finland, the Netherlands, Portugal and Sweden, increase the retirement age by less than one-for-one with life expectancy, precisely because they do not want the fraction of life lived in retirement to fall. In 1930 John Maynard Keynes predicted that people would work only 15 hours per week a century later. Most workers still toil full-time. But such is the rise in the length of retirements that hours in the typical lifetime spent not working has grown by more than Keynes’s prediction implied, wrote Nicholas Crafts of Warwick University in 2022.Pensions are popular with the young as much as the old
Proposals to make even minor changes to pension benefits have provoked furious protests in backlash. In 2023 more than 1m French marched against a gradual increase in the retirement age from 62 to 64; the reform was pushed through using special constitutional powers. Italy has watered down retirement reforms that were legislated for in 2011. Britain’s Labour government announced in 2024 that it would means-test the “winter fuel allowance”—a £300 ($405) annual universal handout that for most recipients has little to do with heating. It was forced to all but U-turn on the proposal. As populations have aged, politics seems to have become more of a bidding war: analysing the manifestos of political parties in 65 countries, IMF researchers have found that both left-wing and right-wing parties have become markedly more expansionist in their promises since about 1990 (see chart 2). Shifts in political rhetoric towards expansionism tend to be followed by bigger deficits.
Where does this leave Nicolas? The direction of the welfare state provides some support for the meme. But it misses two phenomena. The first is that pensions are popular with the young as much as the old. Four in five Americans told Pew, a pollster, in 2024 that social-security benefits should not be reduced in any way, a view broadly shared across demographic groups. A majority of Brits aged 25-49 think the government should definitely or probably keep the triple lock, a guarantee that the country’s state pension rises by earnings, inflation, or 2.5%, whichever is highest, and which over time guarantees that pensions rise relative to wages. Nicolas, it seems, wants his granny to have a nice life—and to enjoy a comfortable retirement himself. The elderly have a lock on welfare states not just because they are a large voting bloc, but because they are sympathetic recipients.
The second omission is that taxes on Nicolas have not risen to anything like the extent that would be necessary to pay for the old—which is why so many governments are running up big debts instead. In both Europe and America, the total tax wedge, or difference between a worker’s take-home pay and what it costs to employ them, is lower today on average than it was in 2000 for an individual earning 167% of the median wage. Even in France and Britain, the increase in the tax wedge is up by less than 2 percentage points.
But Nicolas does have a problem. If governments decide to stave off fiscal crises by balancing budgets, he is the likeliest target. Although the balance of evidence is that belt-tightening is easier on the economy when spending is cut rather than taxes raised, the politics of a greying society make that difficult. The rest of the state has already been squeezed to make room for pensions and health care, and from Italy’s local government reforms to Britain’s pot-holes economists have linked the deterioration of public services to more votes for right-wing populist parties, which incumbents are trying to fight off. Taxes, especially on higher earners, will have to rise instead. That is, unless a more convenient way out of debt is found—a possibility that the next chapter examines. ■
More from this Special Report
- Across the rich world, fiscal crises loom
- How much public debt is too much?
- Fixing the welfare state looks electorally impossible
- Economic growth is unlikely to prevent fiscal crisis
- Big, rich countries have rarely repaid debt with surpluses
- How do some countries avoid debt?
- The case against holding bonds
