Generational selfishness and social security: a time‐inconsistency problem in parametric reforms of PAYG

Yigit Aydede

Journal of Economic Policy Reform, 2010, vol. 13, issue 2, 179-190

Abstract: This paper examines the increase in generational selfishness in parametric reforms of pay‐as‐you‐go (PAYG) pension systems as a potential outcome of the time‐inconsistency problem in optimal policies. When an adverse demographic shock occurs, the planner has to decide on its generational distribution in a parametric reform meant to keep the PAYG system running: benefits can be fixed for seniors or taxes can be stabilized for the young. This paper shows that if the compromising optimal policy between these two extreme examples is nonbinding, it becomes time‐inconsistent. And, parametric reforms tend to be biased in favor of contemporaneous generations, unfair in terms of generational justice, and inefficient in terms of the optimal level of consumption.

Date: 2010
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DOI: 10.1080/17487871003700762

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