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PAYG Pensions and Economic Cycles

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  • Luciano Fanti
  • Luca Gori

Abstract

In this article we compare the dynamics and long-run outcomes of an overlapping generations closed economy under exogenous and endogenous fertility. Individuals have myopic foresight, and pay-as-you-go (PAYG) public pensions exist. Although large PAYG transfers may cause endogenous fluctuations in both contexts, cyclical instability and deterministic chaos more likely occur when fertility is an economic decision variable. We find that the existence of endogenous fertility and PAYG pensions can explain the occurrence of demographic oscillations that mimic the baby boom and baby bust, in contrast with the unrealistic case of constant population, and also economic cycles. We also show that an increase in the social security contribution rate under endogenous fertility, often advocated as a remedy against the crisis of public pension budgets, may prolong both the phases and size of demographic (economic) cycles around a lower (higher) long-run level of population growth (income per worker) than under exogenous fertility.

Suggested Citation

  • Luciano Fanti & Luca Gori, 2012. "PAYG Pensions and Economic Cycles," Public Finance Review, , vol. 40(2), pages 240-269, March.
  • Handle: RePEc:sae:pubfin:v:40:y:2012:i:2:p:240-269
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    References listed on IDEAS

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    2. Zhang, Jie & Zhang, Junsen & Lee, Ronald, 2003. "Rising longevity, education, savings, and growth," Journal of Development Economics, Elsevier, vol. 70(1), pages 83-101, February.
    3. Michel, Philippe & de la Croix, David, 2000. "Myopic and perfect foresight in the OLG model," Economics Letters, Elsevier, vol. 67(1), pages 53-60, April.
    4. Luca Gori & Luciano Fanti, 2008. "Longevity and PAYG pension systems sustainability," Economics Bulletin, AccessEcon, vol. 10(2), pages 1-8.
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    6. Luciano Fanti & Luca Gori, 2009. "Longevity, fertility and PAYG pension systems sustainability," Discussion Papers 2009/77, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    7. Luciano Fanti & Luca Spataro, 2008. "Poverty traps and intergenerational transfers," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 15(6), pages 693-711, December.
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    10. Andreas Wagener, 2003. "Equilibrium dynamics with different types of pay-as-you-go pension schemes," Economics Bulletin, AccessEcon, vol. 8(6), pages 1-12.
    11. Reichlin, Pietro, 1986. "Equilibrium cycles in an overlapping generations economy with production," Journal of Economic Theory, Elsevier, vol. 40(1), pages 89-102, October.
    12. van Groezen, Bas & Leers, Theo & Meijdam, Lex, 2003. "Social security and endogenous fertility: pensions and child allowances as siamese twins," Journal of Public Economics, Elsevier, vol. 87(2), pages 233-251, February.
    13. Francisco Rodríguez & Daniel Ortega, 2006. "Are capital shares higher in poor countries? Evidence from Industrial Surveys," Wesleyan Economics Working Papers 2006-023, Wesleyan University, Department of Economics.
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    Cited by:

    1. Luciano Fanti & Luca Gori, 2012. "Endogenous Lifetime in an Overlapping-Generations Small Open Economy," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 68(2), pages 121-152, June.
    2. Don H. Chamberlain & L. Murphy Smith & Randall B. Bunker, 2016. "An examination of US state pensions by total state expenditures, state budget deficit and red v. blue state," International Journal of Economics and Accounting, Inderscience Enterprises Ltd, vol. 7(1), pages 27-44.
    3. Luciano Fanti & Luca Gori, 2009. "Endogenous fertility, endogenous lifetime and economic growth: the role of health and child policies," Discussion Papers 2009/91, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.

    More about this item

    Keywords

    demoeconomic fluctuations; myopic foresight; PAYG pensions; stability; OLG model;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium

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