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Pensions and external effects of ageing; effects on distribution


  • Kruse, Agneta

    () (Department of Economics, Lund University)

  • Nyberg, Kristian

    () (National Board of Social Insurance)


Ageing gives rise to concern about the sustainability of pay-as-you-go pension systems. One reform option suggested is to make the system actuarial by a tight connection between contributions and benefits. The incentives for the individual will then coincide with the interest of the pension collective. However, the individual actions – fertility decisions, working hours, timing of retirement – also contain a collective part not taken into consideration in the individual’s utility maximisation, a 1/N problem. As pay-as you-go systems are indexed by growth, the index (rate of return) is influenced by these actions even if the system is ‘actuarially fair’. We trace the effects of changes in fertility and early exit/changes in working hours on different generations in an overlapping generation model. The economic model (a stylised model of the economy in aggregate and the pension system) is fitted into a simulation model. We show that the collective effect /external effects are far from negligible. Different measures to cope with these effects are discussed.

Suggested Citation

  • Kruse, Agneta & Nyberg, Kristian, 2004. "Pensions and external effects of ageing; effects on distribution," Working Papers 2004:27, Lund University, Department of Economics.
  • Handle: RePEc:hhs:lunewp:2004_027

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    References listed on IDEAS

    1. Lassila, Jukka & Valkonen, Tarmo, 2001. "Ageing, Demographic Risks, and Pension Reform," Discussion Papers 765, The Research Institute of the Finnish Economy.
    2. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
    3. Hans Fehr & Wenche Irén Sterkeby & Øystein Thøgersen, 2003. "Social security reforms and early retirement," Journal of Population Economics, Springer;European Society for Population Economics, vol. 16(2), pages 345-361, May.
    4. Henning Bohn, 2001. "Social Security and Demographic Uncertainty: The Risk-Sharing Properties of Alternative Policies," NBER Chapters,in: Risk Aspects of Investment-Based Social Security Reform, pages 203-246 National Bureau of Economic Research, Inc.
    5. Cigno, Alessandro, 1993. "Intergenerational transfers without altruism : Family, market and state," European Journal of Political Economy, Elsevier, vol. 9(4), pages 505-518, November.
    6. Marten Palme & lngemar Svensson, 1999. "Social Security, Occupational Pensions, and Retirement in Sweden," NBER Chapters,in: Social Security and Retirement around the World, pages 355-402 National Bureau of Economic Research, Inc.
    7. Hans-Werner Sinn, 1999. "Pension Reform and Demographic Crisis: Why a Funded System is Needed and why it is not Needed," CESifo Working Paper Series 195, CESifo Group Munich.
    8. Breyer, Friedrich & Graf v d Schulenburg, J-Matthias, 1987. "Voting on Social Security: The Family as Decision-Making Unit," Kyklos, Wiley Blackwell, vol. 40(4), pages 529-547.
    9. Alessandro Cigno & Luca Casolaro & Furio C. Rosati, 2000. "The Role of Social Security in Household Decisions: Var Estimates of Saving and Fertility Behaviour in Germany," CESifo Working Paper Series 394, CESifo Group Munich.
    10. Palmer, Edward, 2000. "The Swedish pension reform model : framework and issues," Social Protection and Labor Policy and Technical Notes 23086, The World Bank.
    11. Heikki Oksanen, 2002. "Pension reform: key issues illustrated with an actuarial model," European Economy - Economic Papers 2008 - 2015 174, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    12. Kruse, Agneta, 2002. "Ageing Populations and Intergenerational Risk-sharing in PAYG Pension Schemes," Working Papers 2002:18, Lund University, Department of Economics.
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    Cited by:

    1. Kruse, Agneta, 2005. "Political economy and pensions in ageing societies – a note on how an ”impossible” reform was implemented in Sweden," Working Papers 2005:35, Lund University, Department of Economics.

    More about this item


    pensions; demographics; external effects; OLG-model;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • 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

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