A Dynamic Inconsistency Problem in PAYG: A Solution to the Turkish Puzzle

Yigit Aydede

No 2008-WP-07, NFI Working Papers from Indiana State University, Scott College of Business, Networks Financial Institute

Abstract: Because of the dynamic inconsistency problem in optimal policies of pay-as-you-go (PAYG) systems, parametric reforms tend to be unfair in terms of generational justice and could be inefficient in terms of optimal level of consumption. As long as there are adverse shocks, the planner has to decide on generational distribution of the financial burden in PAYG systems. In this paper we show that if intergenerational transfers are needed to keep the system in balance, any discretionary policy that allocates these transfers between the elderly and the young becomes dynamically inconsistent and the system moves toward being a Ponzi scheme. This may be part of the reason why the government has not been able to resist abusing the system by increasing its generosity for the elderly while expectations on social security wealth for new members have been declining for the last 40 years in Turkey.

Keywords: Dynamic Inconsistency; Optimal Social Security; Social Security Wealth; Intergenerational Transfers; Life-Cycle Consumption (search for similar items in EconPapers)
JEL-codes: E21 H31 J1 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2008-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.indstate.edu/business/sites/business.in ... 008-WP-07_Aydede.pdf Full text (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.indstate.edu/business/sites/business.indstate.edu/files/Docs/2008-WP-07_Aydede.pdf [301 Moved Permanently]--> https://indianastate.edu/business/sites/business.indstate.edu/files/Docs/2008-WP-07_Aydede.pdf)

Related works:
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:nfi:nfiwps:2008-wp-07

Access Statistics for this paper

More papers in NFI Working Papers from Indiana State University, Scott College of Business, Networks Financial Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ray Thomas ().