The biological interest rate is the rate of return created by population growth in simple overlapping-generations models, especially where resources can only be transferred between generations rather than stored physically.
The basic logic
In a pure overlapping-generations setup, the young support the old today and are then supported by the next generation tomorrow. If each generation is larger than the one before it, that demographic growth creates a return on the transfer.
In the simplest case, the gross biological return is tied to population growth. If the population grows at rate n, the return available from this intergenerational transfer mechanism also rises with n.
Why it matters
This idea helps explain why pay-as-you-go pension systems can generate a return even when there is no physical capital. The return is not coming from machines, land, or stored goods. It is coming from the fact that a larger future cohort supports the current retirees.
That is also why demographic slowdown matters. Lower population growth reduces the biological return and can make a pension system harder to sustain without:
- higher contributions,
- lower benefits,
- later retirement,
- or greater reliance on funded saving.
Link to macroeconomic theory
The term appears in Samuelson-style overlapping-generations analysis and is closely related to golden-rule reasoning about intergenerational efficiency. It is mainly a theoretical tool, but it clarifies how demography affects long-run public finance.