Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 499: Can and Should a Pay-As-You-Go Pension System Mimic a Funded System?

John Hassler and Assar Lindbeck ()
Additional contact information
John Hassler: Institute for International Economic Studies, Postal: Stockholm University, 106 91 Stockholm, Sweden
Assar Lindbeck: The Research Institute of Industrial Economics, Postal: Box 5501, 114 85 Stockholm, Sweden

Abstract: This paper considers the possibility of letting a pay-go pension system mimic a fully funded pension system. Generically, it turns out to be impossible to make a less than fully funded pension system actuarially fair on average. But a non-funded pay-go pension system can provide an actuarially fair implicit return on the margin, which increases economic efficiency. The benefits of this fall entirely on current pensioners as a windfall gain unless compensating transfers are implemented. Such a system can be thought of as a pay-go system that mimics a fully funded pension system in combination with lump transfers to current pensioners from current and future workers.

Keywords: Pension systems; Pay-as-you-go; Actuarial; Funding

JEL-codes: H50; H55; H60

18 pages, June 4, 1998

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