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Why increasing longevity may favour a PAYG pension system over a funded system

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  • Dalkhat M. Ediev

Abstract

When pension systems are contrasted it is common to use simplified demographic models, such as overlapping generation models with time-invariant mortality. Breaking with this tradition, we show that for a population with increasing longevity, the pay-as-you-go (PAYG) system may be more advantageous than a funded system (FS). Increasing longevity favours the PAYG system because for the workers living longer at retirement than current retirees, it is less costly to fund others' current pensions than their own. At present, the effect amounts to around 15 per cent in terms of the dependency ratio, or six more years at work in the FS, or 1 per cent per annum in terms of the real interest rate. In most developed countries the effect substantially exceeds that of the usually studied biological interest rate.

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  • Dalkhat M. Ediev, 2014. "Why increasing longevity may favour a PAYG pension system over a funded system," Population Studies, Taylor & Francis Journals, vol. 68(1), pages 95-110, March.
    • Handle: RePEc:taf:rpstxx:v:68:y:2014:i:1:p:95-110
    DOI: 10.1080/00324728.2013.780632
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    1. Andrea Spizzichino & Cinzia Graziani & Maurizio Lucarelli, 2023. "Effects of population ageing on employment in Italy," RIEDS - Rivista Italiana di Economia, Demografia e Statistica - The Italian Journal of Economic, Demographic and Statistical Studies, SIEDS Societa' Italiana di Economia Demografia e Statistica, vol. 77(3), pages 33-43, July-Sept.
    2. Graziella Caselli & Rosa Maria Lipsi, 2018. "Survival inequalities and redistribution in the Italian pension system," Vienna Yearbook of Population Research, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna, vol. 16(1), pages 083-110.
    3. Donatella Cangialosi & Debora Tronu & Daniela Vacca, 2023. "The ageing of the population in urban contexts: a study on Italian metropolitan cities," RIEDS - Rivista Italiana di Economia, Demografia e Statistica - The Italian Journal of Economic, Demographic and Statistical Studies, SIEDS Societa' Italiana di Economia Demografia e Statistica, vol. 77(3), pages 22-32, July-Sept.
    4. Vytenis Juozas Deimantas & A. Ebru Şanlıtürk & Leo Azzollini & Selin Köksal, 2024. "Population Dynamics and Policies in Europe: Analysis of Population Resilience at the Subnational and National Levels," Population Research and Policy Review, Springer;Southern Demographic Association (SDA), vol. 43(2), pages 1-28, April.

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