Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2004:27: Pensions and external effects of ageing; effects on distribution

Agneta Kruse () and Kristian Nyberg ()
Additional contact information
Agneta Kruse: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Kristian Nyberg: National Board of Social Insurance, Postal: National Board of Social Insurance, S-10351 Stockholm, Sweden

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

JEL-codes: D62; H55; J26

22 pages, December 2, 2004

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