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Economists compare welfare across generations by choosing what counts as well-being, deciding how to value outcomes at different times, and making explicit whose gains and losses receive weight. There is no single discount rate or mobility statistic that answers every version of the question: observed market behavior can inform a comparison, while a normative analysis must state its ethical assumptions.
What does it mean to compare welfare across generations?
“Welfare” is not a single directly observed quantity. An analysis might compare income, consumption, wealth, access to public services, or a broader account of people’s opportunities and well-being. It must also specify which people and generations it covers, how far into the future it looks, and how it treats differences between better-off and worse-off people.
Time matters because a policy or economic change can create costs now and benefits later—or the reverse. A discounting rule translates outcomes at different dates into a common comparison. It is a rule for making that comparison, not automatically the same thing as an observed interest rate or investment return.
Two questions are especially easy to conflate:
- How persistent is a particular outcome between parents and children? This is an empirical mobility question about a specified outcome, such as income or education.
- How should the welfare of people living at different times count? This is a normative question about social welfare weights, distribution, and time discounting.
Evidence about mobility can inform the second question, but it does not settle it. A statistic describing income persistence, for example, is not by itself a complete account of welfare or a judgment about fairness.
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Choose the welfare measure before comparing generations
Income is important, but it does not capture every resource that shapes what a household can consume over time. The OECD’s discussion of household economic well-being emphasizes that consumption possibilities also depend on wealth, saving, and the ability to borrow against wealth or expected future savings. A household’s spending in a given period can therefore differ from its income in that period.
Income, consumption, and consumption possibilities
Income measures resources received over a period; consumption measures goods and services used. Neither measure automatically gives the right welfare ranking for every question. Attanasio and Pistaferri’s 2016 essay in the Journal of Economic Perspectives reviews the advantages and disadvantages of using consumption rather than income to assess disparities in well-being. It also discusses differences in spending components, leisure, and intergenerational consumption mobility. The appropriate measure depends on the question being asked and on the available data.
Public services and wealth complicate the picture
Public education, health care, and social housing can contribute to households’ consumption possibilities even when they do not appear as cash income. Including these services may produce a more complete measure in principle, but putting a monetary value on them and assigning that value to beneficiaries requires choices. The OECD notes there is no consensus on how to impute these services, including which services to include, how to value them, and how to allocate them across people.
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Define the population, dates, and units
A credible comparison identifies whose welfare is being aggregated. “Current and future generations” can mean people born in adjacent cohorts, parents and children observed in a mobility study, or people living many decades apart in a policy model. Those groups are not interchangeable. The analyst should state the starting date, the future horizon, whether the comparison uses annual or lifetime outcomes, and whether the population is a country, a subgroup, or all people affected by a policy.
Units also matter. A market return, a consumption interest rate, a percentage change in income, and a utility-weighted welfare index are different quantities. Costs and benefits should be expressed in compatible consumption or welfare units before a discounting rule is applied. Otherwise, an apparently precise result may simply combine measures that answer different questions.
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Two approaches to discounting answer different questions
The National Academies of Sciences, Engineering, and Medicine distinguishes descriptive and prescriptive approaches to discounting in its 2017 report Valuing Climate Damages. The approaches can both inform policy analysis, but they start from different premises.
Descriptive: infer tradeoffs from observed behavior
A descriptive approach looks to market returns and observed choices, such as the tradeoff between saving and consuming or between investments with different risks. One reason to use this approach is that a public policy may displace other investment; the return on that displaced investment can indicate an opportunity cost. It can also be appealing to base resource allocation on tradeoffs people and institutions actually make.
The relevant market rate depends partly on how a policy’s costs and benefits are expressed. If they are stated in consumption equivalents, a consumption interest rate may be relevant; if the comparison concerns investment returns, a return on capital may be more appropriate. The measure and the rate need to match.
Observed behavior does not, however, directly answer how much ethical weight future people should receive. Treating choices made by individuals in markets as society’s normative preference is itself a judgment. In addition, the National Academies notes that few market interest rates provide evidence about consumption tradeoffs over horizons longer than a few decades. A market return can therefore inform the comparison without deciding its ethical terms.
Prescriptive: state the social welfare weights
A prescriptive approach begins by asking how a social planner should weigh the welfare of people living at different times. The National Academies describes it this way: “The normative, ‘prescriptive,’ approach takes the perspective of a social planner who prescribes weights to the welfare of future and current generations.” In this framework, discounting is tied to the rate at which a future dollar is adjusted so it has the same marginal utility for the current generation as it would for the future generation.
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This makes the ethical basis of a comparison more visible. Rather than assuming market choices encode a collective moral preference, the analyst must state the social welfare criterion and the assumptions that determine the relative weight of current and future welfare.
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What the Ramsey relation makes explicit
In its account of the prescriptive approach, the National Academies gives the Ramsey relation:
r = δ + ηg
Here, r is the prescriptive discount rate, δ is the pure time preference rate, η is the absolute elasticity of marginal utility with respect to consumption, and g is per-capita consumption growth. The relation shows that the rate depends on both ethical parameters and an economic assumption or projection about future consumption growth.
- Pure time preference, δ: how the framework values welfare simply because it occurs sooner rather than later. Choosing a value is an ethical judgment, not a measurement of a market return.
- Marginal utility, η: how the welfare value of an additional unit of consumption changes with consumption. In the report’s account, this parameter can combine risk aversion, inequality aversion across people and generations, and preferences over consumption across an individual’s lifetime.
- Consumption growth, g: the assumed or projected rate of per-capita consumption growth. It connects the future consumption level to the marginal-utility comparison.
The parameters cannot be read as settled answers for all intergenerational comparisons. In the climate-change literature summarized in the 2017 report, pure time preference values range from 0 to 3 percent per year, with many cited estimates at or near zero. The report says η values typically fall between 1 and 4 in the literature it reviews and describes 2 percent per year as a commonly used per-capita consumption growth estimate in that discussion. These are contextual ranges and an estimate from a climate-damages discussion, not a universal consensus rate or direct measurement of overall welfare across generations. The report emphasizes that the parameters involve ethical judgment and that estimates vary.
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Suppose an analyst uses δ = 0.5 percent, η = 2, and g = 2 percent per year. Applying the relation gives r = 0.5% + (2 × 2%) = 4.5% per year. This arithmetic illustrates how assumptions combine; it does not establish that 4.5 percent is ethically correct, generally accepted, or suitable for a different policy. Changing the time-preference assumption, the inequality-related parameter, or the growth projection changes the result.
A practical workflow for an intergenerational comparison
- State the welfare object. Decide whether the outcome is income, consumption, consumption possibilities, wealth, or a broader well-being measure. Explain why that object fits the policy question.
- Describe who is counted. Identify the generations, population, and dates. Say whether outcomes are measured for households, individuals, cohorts, or a social total.
- Put outcomes on a common basis. Express costs and benefits in compatible consumption or welfare units. If public education, health care, social housing, saving, borrowing, or wealth are included, document their valuation and allocation.
- Choose the discounting basis. Label the analysis descriptive or prescriptive. For a descriptive rate, identify the observed return or opportunity cost and its horizon. For a prescriptive rate, state the social welfare weights and parameters such as δ, η, and g.
- Check distributional treatment. Explain how an extra unit of consumption is valued when it goes to poorer or richer people and generations. A mobility statistic cannot substitute for this step.
- Test sensitivity. Show how conclusions change when the time preference, marginal-utility parameter, growth assumption, welfare measure, or population horizon changes. A range can reveal whether the ranking is robust or driven by one contestable choice.
This workflow separates factual measurement from ethical judgment. It also makes disagreements easier to diagnose: two analysts may use the same data but reach different results because they use different welfare objects, horizons, or social weights.
What intergenerational mobility statistics can—and cannot—show
An intergenerational elasticity summarizes the persistence of a particular outcome across generations. Researchers use such measures for outcomes including income, education, and occupation. The statistic concerns a defined outcome and relationship; it is not a one-number score for a society’s overall welfare or fairness.
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Data impose important limits. Long panels that follow parents and children are rarely available, and studies may use predicted rather than actual parental income. A reader comparing estimates should check which population and outcome were measured, whether the parental outcome was observed or predicted, and which people are represented in the data.
Even a well-measured mobility estimate does not fully describe the circumstances within or beyond a person’s control, the opportunities they received, or whether the resulting outcomes are fair. Those are broader judgments than persistence alone can answer. Mobility evidence can help describe how outcomes carry across generations; a separate social welfare criterion is needed to decide how that persistence should affect a welfare comparison.
Common pitfalls in interpreting the evidence
- Calling a market return a social discount rate. An observed investment return may represent an opportunity cost, but it does not automatically encode society’s ethical treatment of future people.
- Reporting one rate as a consensus. The National Academies’ 0–3 percent pure-time-preference range, 1–4 range for η, and 2 percent growth estimate come from a climate-damages discussion and should remain tied to that context.
- Mixing income and consumption silently. A result can change when saving, borrowing, leisure, or spending components are measured differently.
- Adding public services without explaining imputation. In-kind services may matter greatly, but their scope, monetary value, and assignment to beneficiaries are not settled by the data alone.
- Treating mobility as fairness. High or low persistence in income, education, or occupation describes transmission of an outcome; it does not determine whether the distribution is just.
- Extrapolating short-horizon evidence indefinitely. Few market rates reveal consumption tradeoffs over more than a few decades, so distant outcomes require an explicit argument about the horizon.
A practical checklist for comparing two analyses or policies
When two studies reach different conclusions, compare their assumptions and coverage before treating one result as a contradiction of the other. The following questions expose many important differences:
- What outcome is being compared? Is it income, consumption, consumption possibilities, or a broader measure? Does it include wealth, saving, borrowing, or services in kind?
- What is the basis for discounting? Is the rate inferred from market behavior, or derived from explicit social welfare weights? If it is descriptive, what tradeoff or opportunity cost does it represent?
- How is time preference treated? Does the framework discount future welfare directly? What value judgment does that encode?
- How are inequality and marginal utility handled? Does the analysis account for how valuable an additional unit of consumption may be to people or generations with different consumption levels?
- What growth assumption is used? Identify the consumption-growth assumption and check whether it fits the policy and population being analyzed.
- Who and what do the mobility data cover? Which outcome is measured, which people are observed, and are parental outcomes actual or predicted?
- How are public services and assets valued? Are in-kind services included? How are they valued and assigned to beneficiaries? Are wealth, saving, and borrowing reflected?
- What is the time horizon? Check which generations and dates are included. A rate supported by observed market behavior over shorter horizons does not, by itself, establish the right treatment of much more distant outcomes.
Two analyses can differ because they measure different things or encode different ethical choices, even if both perform their calculations correctly. A useful comparison identifies those differences rather than looking for a rate detached from its assumptions.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Why climate-damage comparisons make the issue visible
Climate policy is one setting in which current costs and future consequences make intergenerational discounting especially consequential. The National Academies’ 2017 report focuses on valuing climate damages and explains why the choice between descriptive and prescriptive reasoning matters in that context. Its parameter ranges and growth estimate should be read as part of that climate-damages discussion, not transferred automatically to unrelated welfare questions.
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How to read a reported “intergenerational welfare” result
No standalone statistic measures welfare across generations as a whole. A reported number may be a mobility estimate for one outcome, a discount rate, or a parameter used in a social welfare calculation. Those quantities answer different questions and should not be described as interchangeable.
Before accepting a ranking, identify the welfare measure, the population and horizon, the discounting framework, the treatment of inequality, and the evidence behind any mobility claims. A defensible conclusion is one whose value choices and measurement limits are clear enough for readers to understand what the result does—and does not—establish.
Frequently Asked Questions
Is the discount rate the same as an interest rate?
Not necessarily. A discount rate is a comparison rule for outcomes at different dates. Observed market returns can inform a descriptive approach, but a prescriptive rate reflects stated social welfare weights and ethical assumptions.
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Why can’t economists compare generations using income alone?
Income omits some factors that shape consumption possibilities, including accumulated wealth, saving, borrowing, and public education, health care, or social housing. Including those items requires explicit valuation and allocation choices.
What does the Ramsey formula tell us?
The relation r = δ + ηg shows how the prescriptive rate combines pure time preference, the elasticity of marginal utility with respect to consumption, and per-capita consumption growth. It exposes assumptions; it does not supply a universally correct rate.
Does a high intergenerational income elasticity mean welfare is unfairly distributed?
It means the specified income outcome is persistent between generations. It does not by itself describe all circumstances or opportunities, nor does it provide a social welfare function or complete fairness judgment.
Are the 0–3 percent and 1–4 parameter ranges universal?
No. The National Academies reported those ranges in its 2017 discussion of climate-change literature. They are contextual values involving ethical judgment, not a consensus for every intergenerational welfare analysis.
What should I check when two studies disagree?
Compare their welfare measure, population and horizon, descriptive or prescriptive basis, treatment of inequality, consumption-growth assumption, mobility data, and valuation of public services, wealth, saving, and borrowing.
The Bottom Line
Economists compare welfare across generations by defining the welfare measure, specifying the people and time horizon, and choosing a transparent rule for weighting future outcomes. Market behavior can inform a descriptive opportunity-cost calculation; a prescriptive analysis must state its social welfare weights, inequality treatment, and growth assumptions. Mobility statistics describe persistence in particular outcomes, but they do not by themselves decide how generations should be valued or what fairness requires.
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