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Working Paper No. 499

Can and Should a Pay-As-You-Go Pension System Mimic a Funded System?

Working Paper
Reference
Lindbeck, Assar and John Hassler (1998). “Can and Should a Pay-As-You-Go Pension System Mimic a Funded System?”. IFN Working Paper No. 499. Stockholm: Research Institute of Industrial Economics (IFN).

Authors
Assar Lindbeck, John Hassler

This paper considers the possibility of letting a pay-go pension system mimic a fully funded pension system. Generically, it turns out to be impossible to make a less than fully funded pension system actuarially fair on average. But a non-funded pay-go pension system can provide an actuarially fair implicit return on the margin, which increases economic efficiency. The benefits of this fall entirely on current pensioners as a windfall gain unless compensating transfers are implemented. Such a system can be thought of as a pay-go system that mimics a fully funded pension system in combination with lump transfers to current pensioners from current and future workers.