Intergenerational Transfers and Expectations: A Note on How a Ponzi Scheme Affects Saving

Yigit Aydede

No 2008-WP-11, NFI Working Papers from Indiana State University, Scott College of Business, Networks Financial Institute

Abstract: This paper examines the distributional characteristics of parametric reforms carried out when a planner faces an unexpected adverse shock to the pay-as-you-go system. When transfers are used to balance the system, we show that, even if the planner chooses a Ponzi scheme in the face of permanent adverse shocks, agents’ expectations can deviate from the actual public policy, depending on its sustainability in people’s eyes. When the young are forced to share some of the adverse shock by raising their contributions to the system, the total consumption increases unambiguously in the short run, only if this policy is credible and binding. While this increase critically depends on the difference in marginal propensities to consume of living generations, as long as this policy is perceived as unsustainable by the young, the total consumption falls in the long term even if the planner keeps the same policy in the future. This result is different than the common verdict of many studies: when transfers are used to reform a PAYG system, it turns out to be an unsustainable Ponzi scheme, which leads to an increase in total consumption and decline in national saving.

Keywords: Social Security; Expected Intergenerational Transfers; Life-Cycle Saving; Consumption (search for similar items in EconPapers)
JEL-codes: E21 H31 J1 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2008-08
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