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The Case For Pay‐As‐You‐Go Pensions In A Service Economy

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  • Bas Van Groezen
  • Lex Meijdam
  • Harrie A. A. Verbon

Abstract

The elderly consume more labour‐intensive services than young individuals. This makes them vulnerable to rising costs of services due to higher wages, which can be caused by increased capital accumulation. This paper shows that in a model with a service sector, the golden‐rule capital stock is lower and dynamic inefficiency is more likely to occur than in the conventional one‐sector model. This implies that in many cases, a positive Pay‐As‐You‐Go tax maximises long‐run welfare in a service economy. Calculations based on data from the United Kingdom and the Netherlands show that the long‐run optimal degree of funding coincides with the current situation in these countries.

Suggested Citation

  • Bas Van Groezen & Lex Meijdam & Harrie A. A. Verbon, 2007. "The Case For Pay‐As‐You‐Go Pensions In A Service Economy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(2), pages 151-165, May.
    • Handle: RePEc:bla:scotjp:v:54:y:2007:i:2:p:151-165
    DOI: 10.1111/j.1467-9485.2007.00409.x
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    References listed on IDEAS

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    1. Feldstein, Martin, 1996. "The Missing Piece in Policy Analysis: Social Security Reform," American Economic Review, American Economic Association, vol. 86(2), pages 1-14, May.
    2. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695, Elsevier.
    3. Martin Feldstein, 2005. "Structural Reform of Social Security," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 33-55, Spring.
    4. Economic Policy Committee, 2002. "Annual report on structural reforms 2002," European Economy - Economic Papers 2008 - 2015 167, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
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    1. Mario Holzner & Stefan Jestl & David Pichler, 2022. "Public and private pension systems and macroeconomic volatility in OECD countries," Scottish Journal of Political Economy, Scottish Economic Society, vol. 69(2), pages 131-168, May.
    2. Antonis Adam & Thomas Moutos, 2009. "Pension Funding In A Unionized Economy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 56(2), pages 213-231, May.
    3. Luciano Fanti & Luca Gori, 2010. "A two-sector overlapping generations economy: economic growth and multiple equilibria," Discussion Papers 2010/100, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    4. Muysken, J. & Sleijpen, O.C.H.M., 2011. "Lessons from the financial crisis: funded pension funds should invest conservatively," Research Memorandum 020, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    5. Du, C. & Muysken, J. & Sleijpen, O.C.H.M., 2010. "Economy wide risk diversification in a three-pillar pension system," Research Memorandum 055, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    6. Fanti, Luciano & Gori, Luca, 2009. "A two-sector OLG economy: economic growth and demographic behaviour," MPRA Paper 18869, University Library of Munich, Germany.
    7. Du, C. & Muysken, J. & Sleijpen, O.C.H.M., 2010. "Economy wide risk diversification in a three-pillar pension system," Research Memorandum 055, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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