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Demographic change and the rate of return in PAYG pension systems

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  • Schön, Matthias

Abstract

The currently observed demographic change consists of two independent develop-ments that differ in structure and persistence: (1) A slow, monotonic and (presum-ably) permanent ageing effect caused by an increasing life expectancy; (2) a morerapidly changing, non-monotonic and less permanent cohort effect caused by fluc-tuations in the size of cohorts. This paper shows the ageing effect has a positiveimpact on the rates of return households generate within pay-as-you-go (PAYG) pension system. The cohort effect, by contrast, results in winners and losers in PAYG systems. Taking Germany as an example and using a quantitative OLG model the paper shows that the two effects cause rate of return differentials withinthe pension system of almost 1.3 percentage points between generations.

Suggested Citation

  • Schön, Matthias, 2020. "Demographic change and the rate of return in PAYG pension systems," Discussion Papers 57/2020, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:572020
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    More about this item

    Keywords

    Demographic Change; Pension System; OLG Models;
    All these keywords.

    JEL classification:

    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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