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Impact of PAYG pensions on country welfare through capital accumulation

Author

Listed:
  • Kojun Hamada

    (Niigata University)

  • Akihiko Kaneko

    (Waseda University)

  • Mitsuyoshi Yanagihara

    (Nagoya University)

Abstract

This study employs a two-country overlapping generations (OLG) model to examine how the pay-as-you-go (PAYG) pension system affects national welfare through changes in capital accumulation. In a closed economy, increase in per capita pension reduces individual savings, and the decrease in capital weakens welfare under dynamic efficiency. However, when a two-country model with capital mobility is considered, the increase in pension plan in a country may increase the welfare of the capital-exporting country. Employing a two-country model in which capital accumulates and moves between two countries, we present the marginal effect of pension plans on countries’ welfare for the steady-state generations and initial and transitional generations. We demonstrate that a paradoxical result occurs when the increase in pension plans in a country improves the country’s welfare because a higher interest rate improves the capital-exporting country’s intertemporal terms of trade. However, we show that the marginal change in a country’s PAYG pension plan cannot simultaneously improve both countries’ welfare in the steady state.

Suggested Citation

  • Kojun Hamada & Akihiko Kaneko & Mitsuyoshi Yanagihara, 2024. "Impact of PAYG pensions on country welfare through capital accumulation," International Economics and Economic Policy, Springer, vol. 21(1), pages 207-226, February.
    • Handle: RePEc:kap:iecepo:v:21:y:2024:i:1:d:10.1007_s10368-024-00585-0
    DOI: 10.1007/s10368-024-00585-0
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    References listed on IDEAS

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