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We find that segments of society that have shorter life expectancy can expect a lower income from their pensions and lifetime utility due to the longevity of other groups participating in the same pension scheme. Linking the pension age to average life expectancy magnifies the negative effect on the lifetime utility of those who suffer low longevity. Furthermore, when the income of those with greater longevity increases, those with shorter life expectancy become even worse off. Conversely, when the income of those with shorter life expectancy increases, they end up paying more into the pension scheme, which benefits those who live longer. The relative sizes of the low‐ and high‐longevity groups in the population determine the magnitude of these effects. We calibrate the model based on data on differences in life expectancy of different socioeconomic groups and find that low‐income workers suffer from a 10–13% drop in pension benefits from being forced to pay into the same scheme as high‐income workers.

This paper develops a model with overlapping generations of households, productive public and private capital, and a golden rule of fiscal policy aimed at maximizing economic growth. Studying the transitional dynamics between steady states triggered by different exogenous shocks, we find that a waning fertility rate, coming through a weaker preference for having children, increased longevity, a decrease in subjective discounting or lower financial support for child rearing, will require a policy intervention to ensure convergence to the growth maximizing debt level. A simple calibration exercise shows that when faced with projected demographic aging the adjustments in public debt and public investment required for keeping the economy at its maximum steady state growth rate may be small.

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