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The Pension Scheme Need Not Be Pay-As-You-Go: An Overlapping Generations Approach

Mauri Kotamäki

Finnish Economic Papers, 2013, vol. 26, issue 2, 56-71

Abstract: A relevant question in pension scheme research is: Should a country gradually unload its pension funds in order to, for example, counter some of the negative effects of the aging population and thus to prevent pension contribution rate from rising too much? As both Diamond (1965) and Samuelson (1975) have emphasized, ignoring transitional welfare effects is not a good idea and can potentially lead to wrong policy conclusions. Still many choose to concentrate solely on steady state effects. In this paper I illustrate the transitional and steady state effects of moving from a mixed pension scheme to a pay-as-you-go scheme and I show that, given a set of simplifying assumptions, this may not be a wise policy. On the contrary, a country should gradually switch over to a fully funded scheme.

JEL-codes: C68 H54 H55 (search for similar items in EconPapers)
Date: 2013
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Handle: RePEc:fep:journl:v:26:y:2013:i:2:p:56-71