Working Papers, Department of Economics, Lund University
Pensions and external effects of ageing; effects on distribution
() and Kristian Nyberg
Abstract: Ageing gives rise to concern about the sustainability of
pay-as-you-go pension systems. One reform option suggested is to make the
system actuarial by a tight connection between contributions and benefits.
The incentives for the individual will then coincide with the interest of
the pension collective. However, the individual actions – fertility
decisions, working hours, timing of retirement – also contain a collective
part not taken into consideration in the individual’s utility maximisation,
a 1/N problem. As pay-as you-go systems are indexed by growth, the index
(rate of return) is influenced by these actions even if the system is
‘actuarially fair’. We trace the effects of changes in fertility and early
exit/changes in working hours on different generations in an overlapping
generation model. The economic model (a stylised model of the economy in
aggregate and the pension system) is fitted into a simulation model. We
show that the collective effect /external effects are far from negligible.
Different measures to cope with these effects are discussed.
Keywords: pensions; demographics; external effects; OLG-model; (follow links to similar papers)
JEL-Codes: D62; H55; J26; (follow links to similar papers)
22 pages, December 2, 2004
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