EconPapers    
Economics at your fingertips  
 

What's gone wrong in the design of PAYG systems?

Riccardo Magnani

CEPN Working Papers from HAL

Abstract: In order to face the population ageing problem, most countries with PAYG systems introduced pension reforms during the last twenty years. However, in many cases these reforms are considered as insufficient to guarantee the pension sustainability; in other cases, the pension sustainability is achieved through the introduction of drastic reforms and, thus, at the expense of a dramatic reduction in the well-being of current and future generations. The objective of this article is to show that the non-sustainability of PAYG systems and, consequently, the necessity to introduce drastic pension reforms, is explained by the fact that in countries with PAYG systems pensions have not been computed according to appropriate rules. In particular, we show that the sustainability of the pension system is guaranteed if (i) pension benefits are computed using actuarial principles, (ii) the implicit rate of return on contributions is the same for each retiree and equal to the average wage bill growth rate, and (iii) pension reserves are remunerated at a risk-free interest rate equal to the average wage bill growth rate. These conditions allow a PAYG system to face any demographic shock, such as an increase in life expectancy and a transitory increase in fertility rates (baby boom) followed by a transitory reduction in fertility rates (baby boost).

Keywords: Pension economics; Pension finance; Population ageing (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-age
Date: 2018-12-28
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01966571
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://hal.archives-ouvertes.fr/hal-01966571/document (application/pdf)

Related works:
Working Paper: What's gone wrong in the design of PAYG systems? (2018) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:cepnwp:hal-01966571

Access Statistics for this paper

More papers in CEPN Working Papers from HAL
Bibliographic data for series maintained by CCSD ().

 
Page updated 2019-07-23
Handle: RePEc:hal:cepnwp:hal-01966571