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Should we Revive PAYG? On the Optimal Pension System in View of Current Economic Trends

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  • Westerhout, Ed

    (Tilburg University, Center For Economic Research)

  • Meijdam, Lex

    (Tilburg University, Center For Economic Research)

  • Ponds, Eduard

    (Tilburg University, Center For Economic Research)

  • Bonenkamp, Jan

Abstract

Over the last decades, we have generally seen a gradual shift from pay-as-you-go (PAYG) to funding to finance pensions. In this paper, we develop an analytical framework that includes three models of pension design, allowing us to study the role of efficiency, redistribution, and time-consistency in pension policies. We use these models to analyse the impact of several trends (a permanent decline in the rate of return on financial markets, a decline in the average rate of economic growth, decreased output volatility and increased capital market volatility) on the optimal balance between PAYG and funding. Although the models lead to similar qualitative results, general conclusions cannot easily be drawn as the various trends work in opposite directions. A numerical simulation experiment with a calibrated version of the time-consistent model shows that it may be wise to halt the shift towards more funding. There is insufficient evidence however to call for a real revival of PAYG.
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(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

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  • Westerhout, Ed & Meijdam, Lex & Ponds, Eduard & Bonenkamp, Jan, 2021. "Should we Revive PAYG? On the Optimal Pension System in View of Current Economic Trends," Discussion Paper 2021-013, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:63418f60-e248-4dc9-aac8-ffefd6da93a4
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    1. Should we Revive PAYG? On the Optimal Pension System in View of Current Economic Trends
      by Christian Zimmermann in NEP-DGE blog on 2021-05-16 18:28:22

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    More about this item

    Keywords

    PAYG; Funding; Pensions; Aaron Rule;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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