Should we revive PAYG? On the optimal pension system in view of current economic trends
Westerhout,Ed Meijdam,Lex Ponds,Eduard Bonenkamp,Jan
Westerhout,Ed
Meijdam,Lex
Ponds,Eduard
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.
Description
Funding Information: An earlier version of this paper was presented at the Netspar Pension Day, October 29, 2020. We thank the referees of this journal for very useful comments. All remaining errors are our own. The views in this paper do not necessarily represent those of the institutes to which the authors are affiliated. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors. Publisher Copyright: © 2022 The Author(s)
Date
2022-09
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Research Projects
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Keywords
PAYG, funding, pensions, Aaron rule, G20 - General, H21 - Efficiency ; Optimal Taxation, H55 - Social Security and Public Pensions, SDG 1 - No Poverty
Citation
Westerhout, E, Meijdam, L, Ponds, E & Bonenkamp, J 2022, 'Should we revive PAYG? On the optimal pension system in view of current economic trends', European Economic Review, vol. 148, 104227. https://doi.org/10.1016/j.euroecorev.2022.104227