Pension design and the failed economics of squirrels

Nicholas Barr

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper explores the nature of reciprocity between workers and pensioners, starting from the observation that what pensioners consume has mostly to be produced by younger workers, and therefore reciprocity in some form is inherent. The opening section argues that a worker can try to arrange consumption in retirement by (a) storing current production or (b) building claims on future production. However, storing current production (the squirrels model) does not work well, so that the main vehicle is building claims on future production. There are two approaches to doing so – through promises (which lie at the core of Pay-As-You-Go (PAYG) plans), or by accumulating financial assets which can be exchanged for goods and services (the basis of funded plans). The second part of the paper establishes that a central element in assessing pension arrangements is the extent to which investment is in productive assets. The third part considers the durability of different pension regimes. The paper’s central conclusions are (a) that reciprocity is inherent in pension plans, (b) that the specifics of pension design are in many ways secondary, and (c) that what really matters are economic growth (increasing what is available to share between workers and pensioners) and good government (which will manage PAYG pensions responsibly and/or sustain the economic stability and regulatory capacity that underpin funded pensions).

Keywords: pensions; funding; pay-as-you-go; reciprocity; social security; saving; investment (search for similar items in EconPapers)
JEL-codes: D63 E21 E22 E24 J14 J18 (search for similar items in EconPapers)
Pages: 8 pages
Date: 2021-09-06
New Economics Papers: this item is included in nep-age, nep-dem, nep-isf and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in LSE Public Policy Review, 6, September, 2021, 2(1). ISSN: 2633-4046

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:111927

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