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Intergenerational Transfers and Expectations: A Note on How a Ponzi Scheme Affects Saving

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  • H. Yigit Aydede

Abstract

This paper examines the distributional characteristics of parametric reforms carried out when a planner faces an unexpected adverse shock to the pay-as-you-go system. When transfers are used to balance the system, we show that, even if the planner chooses a Ponzi scheme in the face of permanent adverse shocks, agents’ expectations can deviate from the actual public policy, depending on its sustainability in people’s eyes. When the young are forced to share some of the adverse shock by raising their contributions to the system, the total consumption increases unambiguously in the short run, only if this policy is credible and binding. While this increase critically depends on the difference in marginal propensities to consume of living generations, as long as this policy is perceived as unsustainable by the young, the total consumption falls in the long term even if the planner keeps the same policy in the future. This result is different than the common verdict of many studies: when transfers are used to reform a PAYG system, it turns out to be an unsustainable Ponzi scheme, which leads to an increase in total consumption and decline in national saving.

Suggested Citation

  • H. Yigit Aydede, 2008. "Intergenerational Transfers and Expectations: A Note on How a Ponzi Scheme Affects Saving," NFI Working Papers 2008-WP-11, Indiana State University, Scott College of Business, Networks Financial Institute.
    • Handle: RePEc:nfi:nfiwps:2008-wp-11
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    File URL: http://www.indstate.edu/business/sites/business.indstate.edu/files/Docs/2008-WP-11_Aydede.pdf
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    References listed on IDEAS

    as
    1. Modigliani, Franco, 1986. "Life Cycle, Individual Thrift, and the Wealth of Nations," American Economic Review, American Economic Association, vol. 76(3), pages 297-313, June.
    2. H. Yigit Aydede, 2008. "A Dynamic Inconsistency Problem in PAYG: A Solution to the Turkish Puzzle," NFI Working Papers 2008-WP-07, Indiana State University, Scott College of Business, Networks Financial Institute.
    3. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-926, Sept./Oct.
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    More about this item

    Keywords

    Social Security; Expected Intergenerational Transfers; Life-Cycle Saving; Consumption;
    All these keywords.

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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