The world seems more and more trapped in a paradox. Whereas rich, ageing countries should provide finance to poorer, younger ones, the opposite has actually occurred, at least as far as the United States is concerned. Controversy has raged over the sustainability of this pattern of world financing. The INGENUE model can be used to think about possible adjustments scenarios to a "more normal pattern" [INGENUE (2005b)].

INGENUE is a model dedicated to the study of wealth accumulation and economic growth following on from sequentially-differentiated ageing in different parts of the world. In the model, the world is made up of ten regions. It is a dynamic OLG growth model, capable of determining patterns in current account balances and foreign assets, drawing on basic assumptions concerning population forecasts and the speed of technological catching-up in backward regions.

In the US, a return of interest rates towards neutral levels will allow the age structure of households over the life-cycle to be the primary determinant of savings flows. The US current account balance should thus move back to a sustained surplus after 2010.

If and when such and adjustment occurs, questions will arise about engines for world growth and the spillover effects that can be anticipated. INGENUE has been used to explore a scenario in which the driving force of the world economy will be the catching-up of China and then India, throughout the first half of this century [INGENUE (2005a)]. To maximise productivity enhancement the growth factor in these large countries, the redeployment of the growth regime towards domestic demand is a top priority. The best way is to improve social welfare systems vastly, and above all to extend their coverage.

In the INGENUE baseline scenario, Europe will be a slow-growth region and a pervasive world creditor with an appreciating real exchange rate [INGENUE (2005b)]. Such a rentier position in the world economy may be suitable for European households who will enjoy capital income and gains in purchasing power for imported goods. But the continuous slowing down of growth entails mounting financial constraints on pay-as-you-go retirement systems, and risks of more adverse developments than anticipated in the baseline scenario. Given that demographic trends are all-important, the economic consequences of possible errors in population forecasts have been thoroughly investigated [Aglietta and Borgy (2006)]. There is uncertainty concerning fertility rates that are transmitted to the working age population a generation later. Thus, there is a 25% probability that the population growth rate will not reach more than 0.5% a year from 2030 onwards. This occurrence would magnify the constraints on public finances. Finding ways of mitigating these future constraints is a matter of public concern that has been long debated in a closed- or regional-economy framework. INGENUE has shed some light on studying pension reforms in Europe, within the global framework.

Alongside the baseline policy of keeping the net replacement ratio, three alternatives policies have been simulated with the model [INGENUE (2005c)]: a funding policy that keeps the contribution rates constant and develops institutional saving, a policy of enhancing the labour force via increasing the participation ratio and postponing the retirement age and an immigration policy.

The best policy to support average consumption per capita is to raise the participation ratio, because it raises expected income over the whole the life-cycle (European households have to finance a shorter retirement period). In contrast, a strong inflow of migrants slows down real wage growth, as it takes place. A funding policy requires wealth accumulation that restrains consumption per capita, as long as the savings rate is hiked up (given the fact that the public retirement system is being made less generous). Distributional consequences also favour a larger labour force. The funding policy entails a sacrificed generation (households who are aged above 35 years when this pension reform is put in place), which is obliged to save and does not have enough time to substitute for the loss of public benefits. The migratory policy benefits mainly older people who keep their replacement ratio, financed noticeably by young immigrants.

Note: INGENUE is the offspring of a team that includes the following authors: Michel Aglietta (University of Paris X-Nanterre ECONOMIX and CEPII), Vladimir Borgy (CEPII), Jean Chateau (OECD), Michel Juillard (University of Paris VIII-Saint Denis and CEPREMAP), Jacques Le Cacheux (Université of Pau and the Pays de l’Adour and OFCE), Gilles Le Garrec (OFCE) and Vincent Touzé (OFCE and Institute for Political Studies – IEP, Lille).
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