A pension is a promise between a worker and the government. In a pay-as-you-go system, it is also a claim on the younger population. Today’s contributions largely finance today’s retirees. The worker earns a legal entitlement, but the future check will be funded from the production and taxes of a generation that may be much smaller.
This arrangement worked comfortably when each retirement cohort was followed by a larger working cohort. Low fertility reverses the ratio. Across the OECD, the number of people over sixty-five per hundred people ages twenty to sixty-four is projected to rise by more than half between 2025 and 2050. The organization projects average public pension spending to increase from 8.8 percent of GDP in 2023–2024 to 10 percent in 2050, even after reforms already written into law.
Closing the gap means collecting more from workers or changing what retirees receive. Later retirement eases both sides. Borrowing delays the choice, while faster productivity makes it less painful.
Who carries the promise
Pension reform is difficult because the time horizons are mismatched. A change adopted today may affect benefits decades later. Older voters planned around existing rules and have little time to adjust; younger taxpayers can see a larger contribution deducted now for a benefit they are less certain to receive. Both have a reasonable grievance.
The cleanest reforms usually operate gradually. Retirement ages can track part of the gain in healthy life expectancy. Benefits can also be protected more strongly for people with low lifetime earnings, avoiding an adjustment that falls hardest on those with the least room.
Older people raised the taxpayers who follow them and built much of the capital those taxpayers use. Many also provide unpaid care. The fiscal problem lies in the formula: a government that promises a growing stream of transfers from a shrinking base will eventually change the promise or collect more from the base.
Care is harder to finance than a check
Health spending rises with age, though much acute medical spending occurs near death. A longer healthy life can postpone expensive disability. Long-term care presents the less forgiving problem. Help with bathing or eating cannot be stored or imported from the future.
OECD long-term-care spending almost doubled as a share of GDP between 2000 and 2022. The European Commission’s baseline projects public long-term-care spending in the European Union rising from 1.7 percent of GDP in 2022 to 2.4 percent in 2070; under a scenario without gains in healthy aging, it reaches 2.7 percent. The health of those added years changes the bill enormously.
Public and private provision divide payment, while the need remains. If the state does not finance a home-care worker, an adult daughter may reduce her paid hours to provide care. Informal care is real production even when it never appears in a government budget. A fiscal reform that pushes care back into a thinner family can make the accounts look better while making life worse.
Caregiver shortages compound the cost. Long-term care is demanding work, often for poor pay. Productivity is also hard to raise without reducing attention. The OECD reports that the care workforce in many countries has not kept pace with aging. Governments may have enough money appropriated and still lack the person who can show up Tuesday morning.
Debt moves the burden forward
Borrowing can spread a temporary demographic shock. A permanent imbalance returns later as debt service, adding another claim beside pensions on the future tax base. A growing economy can shrink old debts relative to income. A slowly growing or contracting economy has less room.
The distribution matters as much as the total. Protecting every inherited benefit requires higher taxes on a smaller working generation already trying to form families. Deep cuts may instead leave frail adults poor after they organized a lifetime around public promises. Either choice can shift the cost onto people with little room to absorb it.
Fiscal policy therefore becomes an argument about inheritance. Older citizens are owed security. Younger citizens need room to build household wealth without having more of their working lives pledged away. Future citizens cannot vote, yet they receive the debt and age structure left behind.
The arithmetic leaves more than one defensible budget, and every budget requires adjustment. A humane government makes that trade visible and protects people who cannot protect themselves. It should be especially wary of financing present comfort by reducing the capacity of the generation that comes next.
Citations
- Organisation for Economic Co-operation and Development, “Long-term projections of public pension expenditure”, in Pensions at a Glance 2025, 2025.
- Organisation for Economic Co-operation and Development, Ageing Populations: Their Fiscal Implications and Policy Responses, 2025.
- European Commission, 2024 Ageing Report: Economic and Budgetary Projections for the EU Member States (2022–2070), 2024.
- Organisation for Economic Co-operation and Development, “Demographic trends”, in Health at a Glance 2025, 2025.