PAYG Pensions and Economic Cycles

Luciano Fanti and Luca Gori ()

Public Finance Review, 2012, vol. 40, issue 2, 240-269

Abstract: In this article we compare the dynamics and long-run outcomes of an overlapping generations closed economy under exogenous and endogenous fertility. Individuals have myopic foresight, and pay-as-you-go (PAYG) public pensions exist. Although large PAYG transfers may cause endogenous fluctuations in both contexts, cyclical instability and deterministic chaos more likely occur when fertility is an economic decision variable. We find that the existence of endogenous fertility and PAYG pensions can explain the occurrence of demographic oscillations that mimic the baby boom and baby bust, in contrast with the unrealistic case of constant population, and also economic cycles. We also show that an increase in the social security contribution rate under endogenous fertility, often advocated as a remedy against the crisis of public pension budgets, may prolong both the phases and size of demographic (economic) cycles around a lower (higher) long-run level of population growth (income per worker) than under exogenous fertility.

Keywords: demoeconomic fluctuations; myopic foresight; PAYG pensions; stability; OLG model (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (4)

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Working Paper: PAYG pensions and economic cycles (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:sae:pubfin:v:40:y:2012:i:2:p:240-269

DOI: 10.1177/1091142111422435

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