A way out of pay-as-you-go without a double burden
AbstractIt has repeatedly been proposed to reduce the conventional pay-as-you-go-systems to a base level, leaving advanced retirement provision for private funded systems. However, pay-as-you-go-systems are, in a sense, one way roads, with no available Pareto efficient way out. The paper discusses a combined public debt and taxing strategy which distributes the transition burden equally between future generations, leaving them only moderate losses in terms of present value. It is shown within both a two generations model and a multiple-generations model of OLG type, that, with this strategy, there results only a temporary increase in public debt ratio, which even turns into a public surplus in the long run. The paper argues that such a transformation towards a base pension system would be both economically advisable and politically feasible.
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