Economic Effects of Public Pensions

While there are various arguments about public pension system reform, this paper examines the conflicting views from the perspective of economic theory. The paper first explains the raison d fetre of public pension systems and then discusses financing systems of public pensions (funding system and pay-as-you-go system). Under the pay as you go system, the benefits to the elderly at the introduction of the pension system are equal to the sum of the present discounted value of net burden of all generations born thereafter. Also, the pay as you go pension system has a huge amount of net pension debt, which must be borne by future generations. The paper points out that shifting to a funding system is an issue of how many years the repayment of such net liabilities should desirably be spread over. Finally, although consumption tax is generally thought to be a desirable revenue source of the pension system, we point out this idea is incorrect from a theoretical view point.