IDEAS home Printed from
   My bibliography  Save this paper

The life cycle distributional consequence of pay-as-you-go and funded pension systems


  • Falkingham, Jane
  • Johnson, Paul


Using a dynamic cohort microsimulation model (LIFEMOD), the authors examine the life-cycle distributional consequences of a variety of pay-as-you-go (PAYG) and funded pension systems. This technique allows them to investigate both the socioeconomic characteristics and the number of people affected by a change in contribution or eligibility rules in any pension system. LIFEMOD uses 1985 parameters for the United Kingdom so specific results are not valid for other countries. But winners and losers are likely to be similar across countries. They find the following: Women benefit much more than men in a flat-rate PAYG system. In simulations, 84 percent of surviving women but only 33 percent of surviving men are net beneficiaries, because women have higher life expectancy and lower lifetime earnings. Imposing minimum contributions substantially reduces the number of women who qualify for a pension. Imposing a joint contribution rule on the earnings of married couples significantly increases the number of women qualifying without significantly reducing the proportion of qualifying men. In funded pension systems, on average men accumulate much more pension capital than women do because of men's higher earnings and more continuous paid work. Different rates of real interest and earnings growth affect individuals'fund accumulation differently. Women benefit more from high rates of return and low earnings growth because they tend to receive a higher proportion of their lifetime earnings when young. But some men and many women fail to achieve minimum pension levels. If the pension shortfall is compensated for by lump-sum capital top-ups, women receive 93 percent of top-ups (70 percent if joint contributions are used). In hybrid pension systems that combine both PAYG and funded elements, the higher the proportion of PAYG payments, the greater the replacement rate for people in the bottom 40 percent of the lifetime earnings distribution (the majority of whom are women). But replacement rates for people in the middle of income distribution are insensitive to any variant of the PAYG-funded combination. In short, flat-rate pay-as-you-go pension plans and funded pensions produce very different distributional outcomes, the single most important determinant of which is the different lifetime employment and earnings records of men and women.

Suggested Citation

  • Falkingham, Jane & Johnson, Paul, 1993. "The life cycle distributional consequence of pay-as-you-go and funded pension systems," Policy Research Working Paper Series 1200, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1200

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Robert Summers, 1956. "An Econometric Investigation of the Lifetime Size Distribution of Average Annual Income," Cowles Foundation Discussion Papers 9, Cowles Foundation for Research in Economics, Yale University.
    2. Wolfson, Michael C, 1988. "Homemaker Pensions and Lifetime Redistribution," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 34(3), pages 221-250, September.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Alvaro Forteza, 1998. "Un modelo de simulaciĆ³n de la Reforma de la Seguridad Social en Uruguay," Documentos de Trabajo (working papers) 0598, Department of Economics - dECON.
    2. Alvaro Forteza, 1998. "Los efectos fiscales de la Reforma de la Seguridad Social uruguaya," Documentos de Trabajo (working papers) 0898, Department of Economics - dECON.
    3. Alvaro Forteza, 1998. "Los efectos de la Reforma uruguaya de la Seguridad Social en el ahorro," Documentos de Trabajo (working papers) 1098, Department of Economics - dECON.


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1200. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.