Should we Revive PAYG? On the Optimal Pension System in View of Current Economic Trends

Ed Westerhout; Lex Meijdam; Eduard Ponds; Jan Bonenkamp

Should we Revive PAYG? On the Optimal Pension System in View of Current Economic Trends

Research output: Working paper › Discussion paper › Other research output

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Abstract

In many countries, both pay-as-you-go (PAYG) and funding are used to finance pensions, although the balance between the two principles differs a lot between countries. Over the last decades, many countries made a gradual transition to more funding. In this paper, we develop an analytical framework that includes three models of pension design, allowing us to study the role of efficiency aspects, redistributional aspects and political-economy aspects. We subsequently analyze the impact of several trends (a permanent decline in the rate of return on financial markets, a decline in the average rate of economic growth, decreased output volatility and increased capital market volatility) on the optimal balance between PAYG and funding. We argue that it may be optimal to revise the gradual transition to more funding and to revive PAYG.

Original language	English
Place of Publication	Tilburg
Publisher	CentER, Center for Economic Research
Number of pages	40
Volume	2021-013
Publication status	Published - 30 Apr 2021

Publication series

Name	CentER Discussion Paper
Volume	2021-013

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 1 No Poverty

Keywords

PAYG
Funding
Pensions
Aaron Rule

Access to Document

2021-013Submitted manuscript, 600 KB

Connecting Organizations
Bekker, S. (Researcher), Bomer, A. (Researcher), Borghouts, I. (Researcher), De Pietro, C. (Researcher), Dusarduijn, S. (Researcher), Elsweier, F. (Researcher), Essers, P. (Researcher), Garcia Anton, R. (Researcher), Gribnau, H. (Researcher), Gubbels, N. (Researcher), Hoogeveen, M. (Researcher), Houwerzijl, M. (Researcher), Kaufmann, W. (Researcher), Kemmeren, E. (Researcher), Lafarre, A. (Principal Investigator), Lejour, A. (Researcher), Li, J. (Researcher), Loth, M. (Researcher), Mc Cahery, J. (Researcher), Montebovi, S. (Researcher), Peters, C. (Researcher), Rombouts, B. (Researcher), Russo, R. (Researcher), Staats, G. (Researcher), Starink, B. (Researcher), Steegmans, M. (Researcher), Stevens, S. (Researcher), Stevens, T. (Researcher), Sumner, I. (Researcher), Tjong Tjin Tai, E. (Researcher), Tzankova, I. (Researcher), Verbruggen, P. (Researcher), Vermeulen, E. (Researcher), Westerhout, E. (Researcher), Weterings, W. (Researcher), Wibier, R. (Researcher), Xu, D. (Researcher), Zegveld, C. (Researcher), Zekić, N. (Researcher), van Gulijk, S. (Researcher), van Hout, D. (Researcher), van Hulten, M. (Researcher), van Kempen, T. (Researcher), van Kesteren, H. (Researcher), van Vijfeijken, I. (Researcher), Van der Elst, C. (Researcher), Van der Sangen, G. (Researcher), Öner, C. (Researcher), Kryla-Cudna, K. (Researcher), Mak, V. (Researcher), Smit, D. (Researcher), Op Heij, D. (Researcher), Onţanu, E. A. (Researcher), Salah, O. (Researcher), Wijntjens, L. (Researcher), van Norden, G.-J. (Researcher), Vereijken-van den Bosch, S. (Researcher), Fernandez de Aranguiz Chueca, A. (Researcher), Diamant, Y. (Researcher), Geiregat, S. (Researcher), van der Burgt, B. (Researcher), Hofman, A. (Researcher) & Groeneveld-Tijssens, N. (Researcher)
1/01/19 → 31/12/23
Project: Research project

Cite this

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title = "Should we Revive PAYG? On the Optimal Pension System in View of Current Economic Trends",

abstract = "In many countries, both pay-as-you-go (PAYG) and funding are used to finance pensions, although the balance between the two principles differs a lot between countries. Over the last decades, many countries made a gradual transition to more funding. In this paper, we develop an analytical framework that includes three models of pension design, allowing us to study the role of efficiency aspects, redistributional aspects and political-economy aspects. We subsequently analyze the impact of several trends (a permanent decline in the rate of return on financial markets, a decline in the average rate of economic growth, decreased output volatility and increased capital market volatility) on the optimal balance between PAYG and funding. We argue that it may be optimal to revise the gradual transition to more funding and to revive PAYG.",

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T1 - Should we Revive PAYG? On the Optimal Pension System in View of Current Economic Trends

AU - Westerhout, Ed

AU - Meijdam, Lex

AU - Ponds, Eduard

AU - Bonenkamp, Jan

N1 - CentER Discussion Paper Nr. 2021-013

PY - 2021/4/30

Y1 - 2021/4/30

N2 - In many countries, both pay-as-you-go (PAYG) and funding are used to finance pensions, although the balance between the two principles differs a lot between countries. Over the last decades, many countries made a gradual transition to more funding. In this paper, we develop an analytical framework that includes three models of pension design, allowing us to study the role of efficiency aspects, redistributional aspects and political-economy aspects. We subsequently analyze the impact of several trends (a permanent decline in the rate of return on financial markets, a decline in the average rate of economic growth, decreased output volatility and increased capital market volatility) on the optimal balance between PAYG and funding. We argue that it may be optimal to revise the gradual transition to more funding and to revive PAYG.

AB - In many countries, both pay-as-you-go (PAYG) and funding are used to finance pensions, although the balance between the two principles differs a lot between countries. Over the last decades, many countries made a gradual transition to more funding. In this paper, we develop an analytical framework that includes three models of pension design, allowing us to study the role of efficiency aspects, redistributional aspects and political-economy aspects. We subsequently analyze the impact of several trends (a permanent decline in the rate of return on financial markets, a decline in the average rate of economic growth, decreased output volatility and increased capital market volatility) on the optimal balance between PAYG and funding. We argue that it may be optimal to revise the gradual transition to more funding and to revive PAYG.

KW - PAYG

KW - Funding

KW - Pensions

KW - Aaron Rule

M3 - Discussion paper

VL - 2021-013

T3 - CentER Discussion Paper

BT - Should we Revive PAYG? On the Optimal Pension System in View of Current Economic Trends

PB - CentER, Center for Economic Research

CY - Tilburg

ER -

Should we Revive PAYG? On the Optimal Pension System in View of Current Economic Trends

Abstract

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UN SDGs

Keywords

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