Working Paper: NBER ID: w7592
Authors: Hanswerner Sinn
Abstract: Based on explicit present value calculations, the paper criticizes the view that the PAYGO system wastes economic resources. In present value terms, there is nothing to be gained from a transition to funded system even though the latter offers a permanently higher rate of return. The sum of the implicit and explicit tax burdens that result from the need to respect the existing pension claims is the same under all systems and transition strategies. Nevertheless a partial transition to a funded system may be a way to overcome the current demographic crisis because it replaces missing human capital with real capital and helps smooth tax and child reading costs across the generations.
Keywords: pension system; funded system; pay-as-you-go; demographic crisis
JEL Codes: H5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Transitioning from a PAYGO system to a funded system (H55) | does not yield economic gains in present value terms (J17) |
| Higher returns associated with funded systems (G23) | implicit and explicit tax burdens are equivalent across all systems (H22) |
| Partial transition to a funded system (H55) | could alleviate demographic pressures (J11) |
| Replacing missing human capital with real capital (J24) | could enhance intergenerational equity in tax burdens and child-rearing costs (H23) |