Economists compare welfare across generations by first deciding what counts as well-being, then making explicit how outcomes at different times and for different people should be weighted. There is no single discount rate or mobility statistic that settles the comparison: observed market choices and ethical judgments about future generations answer different questions.
What does it mean to compare welfare across generations?
A comparison of welfare asks how well people can live, not simply how much money they receive. For a comparison across generations, economists must also decide which outcomes count, how those outcomes are measured, whose circumstances matter, and how much weight to give welfare at different dates.
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That makes the exercise both economic and normative. Economic evidence can describe consumption, income, wealth, or the persistence of outcomes between parents and children. But evidence alone cannot determine the ethical weight society should assign to a future person’s well-being. That requires a stated criterion for making the comparison.
It helps to keep two questions separate. One is empirical: how persistent is a specified outcome, such as income or education, from one generation to the next? The other is evaluative: how should welfare be distributed across generations? A mobility statistic can inform the second question, but it cannot answer it by itself.
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The time dimension also needs careful definition. “Future generations” might mean children and grandchildren, people several decades from now, or an indefinitely long horizon. A comparison should identify the dates or cohorts involved rather than treating every future outcome as one undifferentiated category. The longer the horizon, the more consequential the assumptions about growth, saving, borrowing, and discounting become.
What is being measured?
Income is important, but it is not a complete measure of economic well-being. The resources available to a household over time depend on consumption, accumulated wealth, saving, and the ability to borrow against wealth or future savings. Income is a flow measured over a period; it does not by itself show the full set of consumption possibilities a household can draw on.
Income and consumption answer related but different questions
Income measures resources received. Consumption measures spending on goods and services. Since households can save or borrow, a household’s consumption in a period need not match its income in that same period. Comparing generations using one measure rather than the other can therefore tell different stories about disparities in well-being.
Neither measure is automatically the right one for every analysis. The choice depends on the question and on which data are available. Consumption data can help assess what households actually spend, while income data can describe resources received; each has advantages and limitations. A study should say which measure it uses rather than treating income and consumption as interchangeable.
Consumption can also be broken into components. Differences in spending on necessities, durable goods, or other goods and services may matter even when two households have similar total expenditure. The relevant comparison could include leisure or the distribution of spending components, depending on the welfare question and the available data. The important point is not that one indicator always dominates, but that the indicator must match the concept being evaluated.
Wealth and services provided in kind matter, too
Assets and the ability to borrow can affect what households are able to consume over time. Public services can also contribute to household well-being without appearing as cash income. Education, health care, and social housing are examples of services that may expand consumption possibilities.
Including these services in a measure can make it more complete in principle, but doing so requires valuation choices. Analysts have to decide which services to include, how to assign a monetary value to them, and which households or people benefit. The OECD discussion of household economic well-being reports no consensus on how to impute these values. A comparison that includes in-kind services should explain how it values and allocates them.
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Saving and borrowing create a further interpretive issue. A generation with higher measured income may consume less because it is accumulating assets, while another with lower current income may draw down wealth or borrow. Looking only at one year’s income can therefore miss differences in the resources available over a longer period. Conversely, adding wealth or borrowing without explaining the accounting can make comparisons difficult to reproduce.
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How does discounting enter the comparison?
Discounting is a rule for comparing a future outcome with a present one. A discount rate compares a future dollar with a dollar today; it is not simply an observed interest rate, nor is it a machine that converts ethical questions into an objective answer. Market returns can inform a discounting choice, but they do not decide how much society should value future welfare.
Two broad approaches appear in economics: descriptive and prescriptive. They address different questions. A descriptive approach asks what rates of return and choices people reveal in markets. A prescriptive approach asks what weights a social planner should assign to welfare at different times. An analysis should identify which approach it uses, because the resulting rate rests on different reasoning.
The distinction matters when a policy has costs today and benefits later. A market return may indicate what investment is displaced, while a social welfare rate may express how a decision maker values the welfare of people who receive the later benefits. Calling either number “the” discount rate hides that the comparison rule depends on purpose, units, assumptions, and values.
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A descriptive approach draws on market returns and choices such as whether people save or consume, or which investments they select when returns and risks differ. One reason for using this approach is opportunity cost: if a policy diverts resources from other investment, the displaced investment may have produced returns that society forgoes. Another is the aim of basing allocation decisions on tradeoffs that people actually make.
The relevant observed rate depends in part on how a policy’s costs and benefits are expressed. If those costs and benefits are stated as consumption equivalents, a consumption interest rate may be relevant; a return on capital may be relevant in other cases. The units and interpretation of the comparison should match the rate being used. Mixing a return on capital with benefits measured in consumption terms can give a misleading result even when both figures are accurately measured.
Observed behavior still does not settle the ethical question. Treating individual choices as society’s normative preference is itself a judgment. Nor do market rates provide much evidence about consumption tradeoffs over horizons longer than a few decades. A rate inferred from market behavior should therefore be described as evidence about observed choices, not as proof of the correct weight for all future generations.
Market behavior may also reflect the circumstances of the people currently making choices rather than the interests of people who do not yet have a voice in markets. That is why a descriptive rate cannot, by itself, establish how a social planner ought to weigh generations that differ in date, resources, or exposure to policy effects.
Prescriptive approach: state social welfare weights
A prescriptive approach starts by asking how current and future welfare should count in a social welfare function. The National Academies of Sciences, Engineering, and Medicine 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.” The approach makes the ethical basis of the comparison explicit rather than inferring it from market choices.
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In this framework, a discount rate can be understood as the rate at which a future dollar is adjusted so that it has the same marginal utility for the current generation as the future generation would receive. The relevant comparison is therefore not just dollars at two dates: it also depends on how valuable an additional unit of consumption is to the people receiving it.
This approach requires more than selecting a number. It requires stating how inequality is treated, whether the same welfare weight applies to every generation, and how assumptions about future consumption affect the value of a future gain or loss. A low rate can reflect a strong concern for future people, but the interpretation also depends on growth and on the marginal utility assigned to consumption at different living standards.
What does the Ramsey formula tell us?
The National Academies’ 2017 account of discounting for climate damages represents the prescriptive rate with the Ramsey relation:
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Here, 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 formula shows that the rate reflects both value choices and an economic assumption or projection.
- Pure time preference (δ): the part associated with weighting welfare at different dates. Choosing it involves a judgment about time preference.
- Elasticity of marginal utility (η): a parameter governing how the marginal utility of consumption changes as consumption changes. It can capture more than one consideration, including risk aversion, inequality aversion across people and generations, and preferences about consumption over an individual’s lifetime.
- Consumption growth (g): the assumed or projected rate of per-capita consumption growth. The rate used should be consistent with the analysis under consideration.
The equation is useful because it exposes assumptions that might otherwise be hidden inside a single rate. It does not eliminate the need to choose those assumptions, and a reader should not mistake its inputs for purely technical facts. Changing any one of the three inputs changes the resulting comparison rule, so a reported rate should be accompanied by the assumptions that generated it.
The formula also helps explain why two careful studies can reach different present values for the same future outcome. They may use different ethical views about pure time preference, different inequality or marginal-utility parameters, or different projections of per-capita consumption growth. The disagreement is then about transparent premises rather than an arithmetic error.
How to interpret the parameter figures
In a 2017 report focused on valuing climate damages, the National Academies summarized pure time preference values used in climate-change literature as ranging from 0 to 3 percent per year, with many cited estimates at or near zero. It reported that values of η typically fell between 1 and 4 in the literature it reviewed, and described 2 percent per year as a commonly used estimate for per-capita consumption growth in that discussion.
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Those figures describe a particular climate-damages literature as summarized in that 2017 report. They are not settled values for every policy or welfare comparison. The report emphasizes that the parameters require ethical judgment and that estimates vary. Applying one of the figures outside that context without explaining why would overstate what the evidence establishes.
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Readers should therefore ask whether a study is importing a parameter from climate-damage analysis into another setting, whether its growth assumption matches the population and horizon being analyzed, and whether its inequality interpretation is explicit. A range or sensitivity analysis can show how conclusions respond to different defensible assumptions, but the range itself must be explained rather than presented as a universal menu.
How do economists measure mobility between generations?
Intergenerational elasticity is one way to summarize the persistence of a particular outcome between parents and children. Researchers have applied mobility measures to outcomes such as income, education, and occupation. The statistic is about the defined outcome and population being studied; it is not a general score for how fair or beneficial an entire society is.
For example, an income elasticity describes how strongly children’s measured income is associated with their parents’ income in the population and specification used by the study. An education or occupation measure answers a different question. Results cannot be treated as interchangeable simply because all are labeled “mobility.” The outcome, cohort, age, and population must accompany the number.
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Coverage can also matter for interpretation. A result based on one observed group or one outcome may not describe opportunities outside that group or outcome. Comparing estimates from different countries or periods requires checking whether their definitions and data sources are sufficiently similar.
Most importantly, persistence and welfare are not the same thing. A mobility measure does not by itself describe all circumstances within or beyond a person’s control, the opportunities available to them, or the fairness of the resulting outcomes. It can contribute evidence to a wider discussion, but it is not a social welfare function.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How to evaluate two intergenerational comparisons
When two studies or policy analyses reach different conclusions, compare their assumptions before treating their results as contradictory. A different welfare measure, rate, population, or time horizon can produce a different answer because the analyses are asking different questions.
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1Repair Windows errors before they cause bigger problems2Fix the driver behind crashes, sound loss and screen glitches3Clear out junk files and repair common Windows errors| Comparison axis | Questions to ask |
|---|---|
| Welfare concept | Is the outcome income, consumption, consumption possibilities, or broader well-being? |
| Basis for discounting | Is the rate inferred from market behavior, or derived from explicit social welfare weights? |
| Time preference | Does the framework discount future utility directly, and what judgment does that encode? |
| Inequality and marginal utility | How does the analysis value an extra unit of consumption for poorer versus richer people or generations? |
| Growth assumptions | What consumption growth is assumed, and is it consistent with the analysis being evaluated? |
| Evidence and coverage | Does mobility data use actual or predicted parent outcomes? Which outcomes and people are observed? |
| Services and assets | Are in-kind services, saving, wealth, and borrowing included? How are they valued? |
For example, an analysis that compares future and present consumption using market evidence is not automatically comparable to one that assigns explicit social welfare weights to future generations. Their rates may differ because their methods answer different questions. Likewise, a mobility estimate for income cannot stand in for a broader assessment that includes education, public services, or other circumstances.
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Also check whether the studies use the same units. A consumption interest rate may be appropriate when effects are expressed in consumption equivalents, while a capital return may address an opportunity-cost calculation. A numerical difference can arise from this unit mismatch rather than from a substantive disagreement about welfare.
A practical sequence for reading or designing a comparison
- Define the welfare outcome. State whether the comparison concerns income, consumption, wealth-related consumption possibilities, or a broader measure. Explain any included public services and how they are valued.
- Specify the population and horizon. Identify which generations or people are being compared and the time span covered. For mobility evidence, define the outcome and population rather than presenting a statistic without its scope.
- Separate empirical persistence from normative ranking. Use a mobility measure to describe persistence in its specified outcome. State the separate welfare criterion used to judge how outcomes should count.
- Identify the discounting approach. Explain whether the rate comes from observed market returns and choices or from social welfare weights. If the analysis uses a market rate, clarify whether it is a return on capital or a consumption interest rate and how that matches the units of the policy benefits and costs.
- Expose the assumptions behind a prescriptive rate. If using the Ramsey relation, report the values or assumptions for δ, η, and g, and explain their interpretation. Do not present a chosen parameter as an objective fact when it encodes a value judgment or projection.
- Check evidence limits and compare like with like. Note whether parental outcomes are observed or predicted, whether the measure covers one outcome or several, and what the data omit. Then compare studies only after aligning their welfare measure, time horizon, and assumptions.
- Report sensitivity and limits. Show whether a conclusion changes under plausible parameter choices or alternative welfare measures, and identify which omitted services, assets, or populations could affect interpretation.
Common mistakes to avoid
- Calling a market return the social discount rate. An observed return provides evidence about investment opportunity cost or revealed choices, not a complete ethical rule for future welfare.
- Using one rate for every purpose. The relevant rate depends on whether effects are expressed as capital returns, consumption equivalents, or marginal utility.
- Treating the Ramsey parameters as facts of nature. δ and η include ethical judgments, while g is an assumption or projection that must fit the analysis.
- Reporting climate-literature ranges as universal consensus. The 0–3 percent, 1–4, and 2 percent figures come from the National Academies’ 2017 climate-damages discussion.
- Using mobility as a fairness score. Persistence in income, education, or occupation does not measure every circumstance or opportunity relevant to welfare.
- Ignoring in-kind services and wealth. Cash income alone can omit education, health care, social housing, saving, borrowing, and accumulated assets that affect consumption possibilities.
- Comparing unlike populations or outcomes. A predicted-parent-income estimate for one cohort cannot automatically be compared with an actual-income estimate for another without checking definitions and coverage.
Why there is no universal intergenerational welfare score
There is no standalone statistic that provides a complete ranking of welfare across generations. Discounting requires choices about time, marginal utility, and growth; mobility statistics describe persistence in particular outcomes; and broader well-being measures require choices about consumption, assets, public services, and valuation. These tools can clarify a comparison, but none substitutes for stating what is being compared and why.
A careful conclusion therefore names its welfare concept, the population and horizon, the treatment of inequality, the discounting rule, and the limits of the available evidence. That makes the value judgments visible and gives readers a way to understand why a different set of assumptions could produce a different result.
Frequently Asked Questions
Is the discount rate the same as an interest rate?
No. A discount rate is a comparison rule for a future dollar and a dollar today. Observed investment returns and market interest rates can inform a descriptive approach, but they do not by themselves determine the ethical weight assigned to future welfare.
What is the Ramsey formula used for?
In the National Academies’ 2017 climate-damages discussion, the prescriptive rate is represented as r = δ + ηg. It makes visible the roles of pure time preference, the elasticity of marginal utility, and per-capita consumption growth.
Are 0 to 3 percent discount rates a consensus?
No. The National Academies reported that range for pure time preference values used in the climate-change literature it reviewed, with many estimates at or near zero. It is not a settled rate for every policy or welfare comparison.
Can income measure welfare across generations?
Income is useful but incomplete. Consumption, wealth, saving, borrowing, and public services such as education and health care also affect consumption possibilities. Any broader measure requires choices about valuation and allocation.
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What does intergenerational elasticity tell us?
It summarizes persistence in a specified outcome, such as income, education, or occupation, between parents and children. It does not by itself measure complete well-being, opportunity, or fairness.
Why might two studies reach different conclusions?
They may use different welfare concepts, populations, horizons, discounting approaches, inequality weights, growth assumptions, or treatment of assets and in-kind services. Their results should be compared only after those choices are aligned.
The Bottom Line
Economists compare welfare across generations by defining the welfare measure, separating mobility evidence from ethical ranking, and stating how future outcomes are weighted. Descriptive market rates and prescriptive social welfare weights answer different questions, while the Ramsey formula makes time preference, inequality, and growth assumptions explicit. No single rate or statistic is universally correct.
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