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The Pension Scheme Need Not Be Pay-As-You-Go: An Overlapping Generations Approach

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  • Mauri Kotamäki

    (School of Economics, University of Turku)

Abstract

A relevant question in pension scheme research is: Should a country gradually unload its pension funds in order to, for example, counter some of the negative effects of the aging population and thus to prevent pension contribution rate from rising too much? As both Diamond (1965) and Samuelson (1975) have emphasized, ignoring transitional welfare effects is not a good idea and can potentially lead to wrong policy conclusions. Still many choose to concentrate solely on steady state effects. In this paper I illustrate the transitional and steady state effects of moving from a mixed pension scheme to a pay-as-you-go scheme and I show that, given a set of simplifying assumptions, this may not be a wise policy. On the contrary, a country should gradually switch over to a fully funded scheme.

Suggested Citation

  • Mauri Kotamäki, 2013. "The Pension Scheme Need Not Be Pay-As-You-Go: An Overlapping Generations Approach," Finnish Economic Papers, Finnish Economic Association, vol. 26(2), pages 56-71, Autumn.
    • Handle: RePEc:fep:journl:v:26:y:2013:i:2:p:56-71
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    More about this item

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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