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Why a Funded Pension System is Useful and Why It is Not Useful

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  • Hans-Werner Sinn

Abstract

Based on explicit present value calculations, the paper criticizes the view that the PAYGO system wastes economic resources. In present value terms, there is nothing to be gained from a transition to funded system even though the latter offers a permanently higher rate of return. The sum of the implicit and explicit tax burdens that result from the need to respect the existing pension claims is the same under all systems and transition strategies. Nevertheless a partial transition to a funded system may be a way to overcome the current demographic crisis because it replaces missing human capital with real capital and helps smooth tax and child reading costs across the generations.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7592.

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Date of creation: Mar 2000
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Publication status: published as Sinn, Hans-Werner. "Why A Funded Pension System Is Needed And Why It Is Not Needed," International Tax and Public Finance, 2000, v7(4/5,Aug), 389-410.
Handle: RePEc:nbr:nberwo:7592

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  1. Homburg, Stefan & Richter, Wolfram, 1990. "Eine effizienzorientierte Reform der GRV," EconStor Open Access Articles, ZBW - German National Library of Economics, ZBW - German National Library of Economics, pages 183-191..
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  3. Brunner, Johann K., 1996. "Transition from a pay-as-you-go to a fully funded pension system: The case of differing individuals and intragenerational fairness," Journal of Public Economics, Elsevier, Elsevier, vol. 60(1), pages 131-146, April.
  4. Hans-Werner Sinn, 1998. "The Pay-As-You-Go Pension System as a Fertility Insurance and Enforcement Device," NBER Working Papers 6610, National Bureau of Economic Research, Inc.
  5. Marcel Thum & Jakob von Weisäcker, 2000. "Implizite Einkommensteuer als Messlatte für die aktuellen Rentenreformvorschläge," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, Verein für Socialpolitik, vol. 1(4), pages 453-468, November.
  6. Sinn, Hans-Werner, 1997. "The Value of Children and Immigrants in a Pay-As-You-Go Pension System: A Proposal For a Partial Transition to a Funded System," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1734, C.E.P.R. Discussion Papers.
  7. Corneo, Giacomo & Jeanne, Olivier, 1997. "On relative wealth effects and the optimality of growth," Economics Letters, Elsevier, Elsevier, vol. 54(1), pages 87-92, January.
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  9. Homburg, Stefan, 1990. "The Efficiency of Unfunded Pension Schemes," EconStor Open Access Articles, ZBW - German National Library of Economics, ZBW - German National Library of Economics, pages 640-647.
  10. Matthias Wrede, 1999. "Pareto Efficient Pay-as-You-Go Pension Systems with Multi-Period Lives," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 219(3+4), pages 494-503, September.
  11. Martin Feldstein, 1995. "Would Privatizing Social Security Raise Economic Welfare?," NBER Working Papers 5281, National Bureau of Economic Research, Inc.
  12. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
  13. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(5), pages S71-102, October.
  14. Laurence J. Kotlikoff, 1998. "Simulating the Privatization of Social Security in General Equilibrium," NBER Chapters, National Bureau of Economic Research, Inc, in: Privatizing Social Security, pages 265-311 National Bureau of Economic Research, Inc.
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  17. Robert Fenge & Jakob von Weizsäcker, 1999. "To what Extent are Public Pensions Pareto-improving? On the Interaction of Means Tested Basic Income and Public Pensions," CESifo Working Paper Series 197, CESifo Group Munich.
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