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What’s New in the Debate About Pay-as-you-go Versus Funded Pensions?

  • Hervé BoulholEmail author
  • Marius Lüske
Chapter
Part of the Financial and Monetary Policy Studies book series (FMPS, volume 48)

Abstract

Recent history has shown that with tight public finances the costs associated with a transition from a PAYGO to a diversified pension system with funded and PAYGO components can be high. A number of countries backtracked on previously decided transitions, highlighting that the political risk of policy reversals is considerable. There is an actuarial equivalence between PAYGO and funded schemes. While, when an economy is dynamically efficient, a move from PAYGO to funding can boost future pension levels, it creates both winners and losers, thus implying some form of redistribution. Hence, choosing one type of financing over the other is essentially a political decision. While the economic condition for dynamic efficiency was typically fulfilled without ambiguity in the past, the current economic context questions whether this is still the case, suggesting to revisit the trade-off between PAYGO and funded schemes. Risk diversification remains a key argument for combining PAYGO and funded elements, but the benefits of risk-diversification should be weighed against the medium-term costs generated by the transition towards a multi-pillar system.

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Copyright information

© Springer Nature Switzerland AG 2019

Authors and Affiliations

  1. 1.OECD’s Directorate for Employment, Labour and Social AffairsParisFrance

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