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.
The opinions and arguments expressed herein are those of the authors and do not necessarily reflect the official views of the OECD or its member countries. The authors are grateful to Maciej Lis for his comments.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
To get an order of magnitude of that implicit tax, r and g are not here annual rates but compounded over the working life.
References
Abel AB, Mankiw NG, Summers LH, Zeckhauser RJ (1989) Assessing dynamic efficiency: theory and evidence. Rev Econ Stud 56(1):1–19
Barr N, Diamond P (2008) Reforming pensions: principles and policy choices. Oxford University Press, Oxford
Bielawska K, Chlon-Dominczak A, Stanko D (2016) Retreat from mandatory pension funds in countries of the Eastern and Central Europe in result of financial and fiscal crisis: causes, effects and recommendations for fiscal rules. Warsaw School of Economics, Warsaw
Blanchard O (2019) Public debt and low interest rates. American Economic Association Presidential Address
Börsch-Supan A, Härtl K, Leite DN (2016) Chapter 13: Social security and public insurance. In: Handbook of the economics of population ageing, vol 1B. Elsevier, Amsterdam, pp 781–863
Boulhol H (2019) Objectives and challenges in the implementation of a universal pension system in France. OECD Working Papers, forthcoming
Breyer F (1989) On the intergenerational Pareto efficiency of pay-as-you-go financed pension schemes. J Inst Theor Econ 145:643–658
Carvalho C, Ferrero A, Nechio F (2016) Demographics and real interest rates: inspecting the mechanism. Eur Econ Rev 88:208–226
Crafts N (2019) The future growth path for Europe and Ireland. Third annual conference of the Irish fiscal advisory council, path for the public finances, 2019: long-term fiscal sustainability: winter is coming!. https://www.fiscalcouncil.ie/path-for-the-public-finances-2019-long-term-fiscal-sustainability-winter-is-coming/
Diamond P (1965) National debt in a neoclassical growth model. Am Econ Rev 55:1126–1150
Geerolf F (2018) Reassessing dynamic efficiency, mimeo
Holston K, Laubach T, Williams JC (2017) Measuring the natural rate of interest: international trends and determinants. J Int Econ 108:1
Homburg S (2014) Overaccumulation, public debt and the importance of land. Ger Econ Rev 5:4
ILO (2017) World Social Protection Report 2017–2019: Universal social protection to achieve the sustainable development goals. Geneva
Kajitani K, Kinugasa T, Lun K (2018) Dynamic efficiency in world economy, Discussion Paper No. 1801. Graduate School of Economics, Kobe University
OECD (2015) Pensions at a glance. OECD Publishing, Paris
OECD (2016) OECD economic outlook 2016 2. OECD Publishing, Paris. https://doi.org/10.1787/eco_outlook-v2016-2-en
OECD (2017) Pensions at a glance. OECD Publishing, Paris
OECD (2018a) Pension markets in focus. OECD Publishing, Paris
OECD (2018b) Pensions outlook. OECD Publishing, Paris
Orszag P, Stiglitz JE (2001) Rethinking pension reform: ten myths about social security systems. In: Holman R, Stiglitz JE (eds) New ideas about old age security: toward sustainable pension systems in the twenty-first century. World Bank, Washington, D.C., pp 17–56
Poterba J (2004) Impact of population aging on financial markets in developed countries. Econ Rev 89:43–53
Rofman R, Fajnzylber E, Herrera G (2010) Reforming the pension reforms: Argentina and Chile. CEPAL Rev (101):83–106
Samuelson P (1958) An exact consumption-loan model of interest with or without the social contrivance of money. J Public Econ 66:467–482
Sinn HW (2000) Why a funded pension system is useful and why it is not useful. Int Tax Public Financ 7:389–410
World Bank (1994) Averting the old agee crisis: policies to protect and promote growth. Washington, DC
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2019 Springer Nature Switzerland AG
About this chapter
Cite this chapter
Boulhol, H., Lüske, M. (2019). What’s New in the Debate About Pay-as-you-go Versus Funded Pensions?. In: da Costa Cabral, N., Cunha Rodrigues, N. (eds) The Future of Pension Plans in the EU Internal Market. Financial and Monetary Policy Studies, vol 48. Springer, Cham. https://doi.org/10.1007/978-3-030-29497-7_3
Download citation
DOI: https://doi.org/10.1007/978-3-030-29497-7_3
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-030-29496-0
Online ISBN: 978-3-030-29497-7
eBook Packages: Economics and FinanceEconomics and Finance (R0)