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Extending the Aaron Condition for Alternative Pay-as-You-Go Pension Systems

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  • Miriam Steurer

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    (School of Economics, The University of New South Wales)

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    Abstract

    Welfare comparisons between funded and pay-as-you-go (PAYG) pension systems are often made using the Aaron condition. However, the Aaron condition as usually stated is not precise enough about the exact form of the PAYG pension system. PAYG pension systems can be either of the defined-benefit or defined-contribution variety. They can also differ with regard to intra-generational redistribution. For example, pension benefits can be flat or earnings related. Here, four alternative PAYG pension systems are considered. It is shown that each system generates its own Aaron condition. In addition, the standard Aaron condition assumes that the wage rate and labor participation rate does not vary across individuals and that the rate of population growth is constant and exogenous. These assumptions are also relaxed. Using US data covering the period 1933-2001, I then show that the results of comparisons between PAYG and funded systems depend critically on exactly which variety of PAYG system is being compared, and that PAYG systems are becoming less attractive over time as fertility rates decline.

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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2009-03.pdf
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    Bibliographic Info

    Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2009-03.

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    Length: 21 pages
    Date of creation: Mar 2009
    Date of revision:
    Handle: RePEc:swe:wpaper:2009-03

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    Keywords: Aaron Condition; Pay-As-You-Go Pension; Funded Pension; Defined Contribution; Defined Benefit; Labor Participation Rate; Fertility Rate;

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    1. repec:fth:stanho:e-90-11 is not listed on IDEAS
    2. Martin Feldstein, 1982. "The Optimal Level of Social Security Benefits," NBER Working Papers 0970, National Bureau of Economic Research, Inc.
    3. Martin Kolmar, 1997. "Intergenerational redistribution in a small open economy with endogenous fertility," Journal of Population Economics, Springer, vol. 10(3), pages 335-356.
    4. Cigno, Alessandro & Luporini, Annalisa & Pettini, Anna, 2003. "Transfers to families with children as a principal-agent problem," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 1165-1177, May.
    5. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
    6. Thomas MaCurdy & David Green & Harry Paarsch, 1990. "Assessing Empirical Approaches for Analyzing Taxes and Labor Supply," Journal of Human Resources, University of Wisconsin Press, vol. 25(3), pages 415-490.
    7. Blake, David, 2000. "Does It Matter What Type of Pension Scheme You Have?," Economic Journal, Royal Economic Society, vol. 110(461), pages F46-81, February.
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