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On the Design of Sustainable and Fair PAYG Pension Systems When Cohort Sizes Change

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Author Info
Markus Knell () (Oesterreichische Nationalbank, Economic Studies Division)

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Abstract

In this paper, the author deals with the question how to make PAYG pension systems financially resistant to fluctuating fertility rates. The author presents two pension schemes that lead to a permanently balanced budget but differ in the mixture of changes in the contribution rates and replacement rates they require in order to achieve this result. After analyzing the variations in the central parameters (both over time and across generations) for each of the schemes he discusses which consequences they have with regard to intergenerational burden sharing and fairness. In particular, the author is interested in how a generation is affected by changes in the size of proceeding and succeeding cohorts. He introduces a proportionality measure(defined as the ratio of relative inputs to relative outputs) that can be used as an indicator to study this impact. The author shows that the schemes have quite different implications concerning how past and future cohorts influence the proportionality measure. Finally he discusses how suitable the formulas are to be implemented in either traditional PAYG or in notional defined contribution (NDC) systems.

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Publisher Info
Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 95.

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Length: 52 pages
Date of creation: 07 Feb 2005
Date of revision:
Handle: RePEc:onb:oenbwp:95

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Postal: P.O. Box 61, A-1011 Vienna, Austria
Phone: +43/1/404 20 7205
Fax: +43/1/404 20 7299
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Web page: http://www.oenb.at/
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Postal: Oesterreichische Nationalbank, Economic Studies Division, c/o Beate Hofbauer-Berlakovich, POB 61, A-1011 Vienna, Austria
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For technical questions regarding this item, or to correct its listing, contact: (Markus Knell and Helmut Stix).

Related research
Keywords: Pension System Demographic Change Intergenerational Fairness

Other versions of this item:

Find related papers by JEL classification:
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
J1 - Labor and Demographic Economics - - Demographic Economics
J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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References listed on IDEAS
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  1. Roger H. Gordon & Hal R. Varian, 1985. "Intergenerational Risk Sharing," NBER Working Papers 1730, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Robert Fenge & Martin Werding, 2004. "Ageing and the tax implied in public pension schemes: simulations for selected OECD countries," Fiscal Studies, Institute for Fiscal Studies, vol. 25(2), pages 159-200, June.
    Other versions:
  3. Kenneth J. Arrow, . "Intergenerational Equity and the Rate of Discount in Long-Term Social Investment," Working Papers 97005, Stanford University, Department of Economics. [Downloadable!]
  4. Mathias Kifman & Dirk Schindler, 2000. "Smoothing the Implicit Tax Rate in a Pay-as-you-go Pension System," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 57(3), pages 261-, May.
  5. Toyotaka Sakai, 2003. "An axiomatic approach to intergenerational equity," Social Choice and Welfare, Springer, vol. 20(1), pages 167-176. [Downloadable!] (restricted)
  6. James Konow, 2003. "Which Is the Fairest One of All? A Positive Analysis of Justice Theories," Journal of Economic Literature, American Economic Association, vol. 41(4), pages 1188-1239, December.
  7. Assar Lindbeck & Mats Persson, 2003. "The Gains from Pension Reform," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 74-112, March.
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  8. Valdes-Prieto, Salvador, 2000. " The Financial Stability of Notional Account Pensions," Scandinavian Journal of Economics, Blackwell Publishing, vol. 102(3), pages 395-417, June. [Downloadable!] (restricted)
  9. Friedrich Breyer, 2000. "Kapitaldeckungs- versus Umlageverfahren," Perspektiven der Wirtschaftspolitik, Blackwell Publishing, vol. 1(4), pages 383-405, November. [Downloadable!] (restricted)
  10. John Geanakoplos & Olivia S. Mitchell & Stephen P. Zeldes, . "Social Security Money's Worth," Pension Research Council Working Papers 97-20, Wharton School Pension Research Council, University of Pennsylvania.
    Other versions:
  11. Hassler, J. & Lindbeck, A., 1997. "Intergenerational Risk Sharing, Stability and Optimality of Alternative Pension Systems," Research Institute of Industrial Economics Working Papers 493, Research Institute of Industrial Economics.
    Other versions:
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