During today's PlayStation 5 livestream, Sony announced that the PlayStation 5 will be backwards compatible with PS4 and PS4 Pro games, but the company made no mention of retro PS1, PS2, and PS3 titles. Mark Cerny, Sony's lead system architect for PlayStation hardware, said the following about the PS5's backwards compatibility (emphasis ours):
"The PlayStation 5 GPU is backwards compatible with PlayStation 4. What does that mean? One way you can achieve backwards compatibility is to put the previous console's chips at in the new consoles like we did with some PlayStation 3s, but that's of course extremely expensive. A better way is to incorporate any differences in the previous console's logic into the new console's custom chips, meaning that even as the technology evolves, the logic and feature set that PlayStation 4 and PlayStation 4 Pro titles rely on is still available in backwards compatibility modes. One advantage of this strategy is that once backwards compatibility is in the console, it's in, and it's not as if a cost-down will remove backwards compatibility like it did on PlayStation 3. Achieving this unification of functionality took years of efforts by AMD, as any roadmap advancement creates a potential divergence in logic. Running PS4 and PS4 Pro titles at boosted frequencies has also added complexity: the boost is truly massive this time around, and some game code just can't handle it. Testing has to be done on a title by title basis. Results are excellent, though; we recently took a look at the top 100 PlayStation 4 titles as ranked by playtime and we're expecting almost all of them to be playable at launch on PlayStation 5.
This is great news for PS4 owners. Judging from the quote above, it looks like most popular PS4 and PS4 Pro titles will be playable at launch, and Sony intends to improve performance with boost clocks. Also, Cerny seemed to imply that backwards compatibility will be present in future versions of the PS5 even in the event of a "cost-down," which is a reference to "slim" versions of its past consoles that cost less money to make.
Unfortunately it does not yet appear that Sony is interested bringing compatibility with retro titles to the PS5 like Microsoft has with its Xbox One consoles, but it didn't specifically rule that out. With the PS4, Sony relies on PlayStation Now game streaming and various one-off ports in the PlayStation Store for its classic titles, but unlike full backwards compatibility, your selection is limited and one way or another you're going to pay again for your favorite games.