Aging and the Pension Crisis: Flexibilization through Capital Markets

Douglas Gale
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Douglas Gale: New York University

No 00-04, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: This paper argues that the pay-as-you-go systems that dominate the old age social security programs in Europe cannot provide the flexibility necessary to master the demographic changes to come. Pay-as-you-go systems are locked between the Scylla of low pension levels and the Charybdis of high contribution rates. Funded systems, in contrast, can provide additional flexibility in several dimensions. Most importantly, they can intertemporally smoothen the demographic burden across a much longer time period than pay-as-you-go-systems, and they can internationally diversify, thereby enabling mutual gains from trade between aging and more youthful countries.

Pages: 15 pages
Date: 2000-01-07
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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