Working Paper: CEPR ID: DP1774
Authors: John Hassler; Assar Lindbeck
Abstract: In an analysis of the risk-sharing properties of different types of pension systems, we show that only fixed-fee pay-as-you-go (PAYG) pension systems can provide risk sharing for living individuals. Under some circumstances, however, other PAYG pension systems can enhance the expected welfare of all generations by reducing intergenerational income variability. The paper derives conditions for this to occur. It also analyses the stability of actuarially fair PAYG pension systems. It is shown that if an actuarially fair pension with a non-balanced budget system is dynamically stable, its accumulated surpluses will converge to the same fund as in a fully funded system. The paper also shows that the welfare loss due to labour market distortions will, in fact, increase if the implicit marginal return in a compulsary system is raised above the average return.
Keywords: pension systems; pay-as-you-go; intergenerational
JEL Codes: H55; H6; H3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fixed-fee PAYG pension systems (H55) | intergenerational risk sharing (D15) |
| other PAYG systems (H55) | intergenerational income variability (D15) |
| other PAYG systems (H55) | expected welfare (D69) |
| actuarially fair PAYG system is dynamically stable (H55) | accumulated surpluses converge to fully funded system (H62) |
| implicit marginal return in compulsory system exceeds average return (H55) | welfare loss due to labor market distortions (J48) |