Should we revive PAYG? On the optimal pension system in view of current economic trends

Ed Westerhout, Lex Meijdam, Eduard Ponds and Jan Bonenkamp

European Economic Review, 2022, vol. 148, issue C

Abstract: Over the last decades, we have generally seen a gradual shift from pay-as-you-go (PAYG) to funding to finance pensions. In this paper, we develop an analytical framework that includes three models of pension design, allowing us to study the role of efficiency, redistribution, and time-consistency in pension policies. We use these models to analyse the impact of several trends (a permanent decline in the rate of return on financial markets, a decline in the average rate of economic growth, decreased output volatility and increased capital market volatility) on the optimal balance between PAYG and funding. Although the models lead to similar qualitative results, general conclusions cannot easily be drawn as the various trends work in opposite directions. A numerical simulation experiment with a calibrated version of the time-consistent model shows that it may be wise to halt the shift towards more funding. There is insufficient evidence however to call for a real revival of PAYG.

Keywords: PAYG; Funding; Pensions; Aaron rule (search for similar items in EconPapers)
JEL-codes: G20 H21 H55 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Should we Revive PAYG? On the Optimal Pension System in View of Current Economic Trends (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:148:y:2022:i:c:s0014292122001325

DOI: 10.1016/j.euroecorev.2022.104227

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