Hostname: page-component-78c5997874-mlc7c Total loading time: 0 Render date: 2024-11-06T08:05:48.106Z Has data issue: false hasContentIssue false
  • English
  • Français

PAY-AS-YOU-GO PENSIONS AND ENDOGENOUS RETIREMENT

Published online by Cambridge University Press:  30 January 2019

Pan Liu  and
Joachim Thøgersen
Pan Liu*
Affiliation:
Beijing Normal University
Joachim Thøgersen
Affiliation:
Oslo Metropolitan University
*
Address correspondence to: Pan Liu, Business School, Beijing Normal University, No. 19, XinJieKouWai St., HaiDian District, Beijing 100875, P. R. China; e-mail: [email protected]. Phone: (+86)10-58802154.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper revisits two classic results in standard overlapping generations models with a pay-as-you-go (PAYG) pension system. Firstly, a PAYG system crowds out private savings and reduces the overall capital stock. Secondly, in dynamically efficient economies, a PAYG system will reduce steady-state welfare. These classic results have been derived and exposed in models with no retirement decision. However, by allowing for endogenous retirement, and without taking recourse to any frictions, uncertainty, or myopia, it is shown that a PAYG system may be neutral and may even increase the capital–labor ratio. In particular, it is shown that the effect of the pension contribution rate on capital intensity depends on the elasticity of substitution between consumption and leisure. If the elasticity of substitution is between 0 and 1, an increase in the contribution rate will increase capital intensity. Moreover, it is shown that the result regarding welfare may also be overturned. An increase in the PAYG contribution rate may increase steady-state welfare.

Keywords

Endogenous RetirementPensionsSocial SecurityWelfare
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Issue 7 , October 2020 , pp. 1700 - 1719
Copyright
© Cambridge University Press 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We are indebted to Joydeep Bhattacharya, Steinar Holden, Øystein Thøgersen, and two anonymous referees for valuable comments and suggestions. An earlier draft of this paper was presented at the Overlapping Generations Days, 2014, the International Institute of Public Finance conference, 2014, and the Annual Missouri Economics Conference, 2014. This research was supported by the Fundamental Research Funds for the Central Universities of China.

References

Aaron, H. (1966) The social insurance paradox. Canadian Journal of Economics 32, 371–374.Google Scholar
Abel, A. B., Mankiw, G. N., Summers, L. H. and Zeckhauser, R. J. (1989) Assessing dynamic efficiency: Theory and evidence. Review of Economic Studies 56, 1–20.CrossRefGoogle Scholar
Andersen, T. M. and Bhattacharya, J. (2011) On myopia as rationale for social security. Economic Theory 47, 135–158.CrossRefGoogle Scholar
Andersen, T. M. and Bhattacharya, J. (2013) Unfunded pensions and endogenous labor supply. Macroeconomic Dynamics 17, 971–997.CrossRefGoogle Scholar
Andersen, T. M. and Bhattacharya, J. (2017) The intergenerational welfare state and the rise and fall of pay-as-you-go pensions. The Economic Journal 127(602), 896–923.CrossRefGoogle Scholar
Azariadis, C. (1993) Intertemporal Macroeconomics. Oxford: Blackwell Publishers.Google Scholar
Barbie, M., Hagedorn, M. and Kaul, A. (2004) Assessing aggregate tests of efficiency for dynamic economies. The BE Journal of Macroeconomics 4, 1–17.Google Scholar
Blanchard, O. and Fischer, S. (1989) Lectures on Macroeconomics. Cambridge, MA: MIT Press.Google Scholar
Boldrin, M. and Montes, A. (2005) The intergenerational state education and pensions. The Review of Economic Studies 72(3), 651–664.CrossRefGoogle Scholar
Caliendo, F. N. and Gahramanov, E. (2011) Myopia and pensions in general equilibrium. Journal of Economics and Finance 35, 470–502.Google Scholar
Conesa, J. C. and Krueger, D. (1999) Social security reform with heterogeneous agents. Review of Economic Dynamics 2, 757–795.CrossRefGoogle Scholar
Cooley, T. F. and Soares, J. (1999) A positive theory of social security based on reputation. Journal of Political Economy 107(1), 135–160.CrossRefGoogle Scholar
de la Croix, D. and Michel, P. (2002) A Theory of Economic Growth: Dynamics and Policy in Overlapping Generations. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Diamond, P. A. (1965) National debt in a neoclassical growth model. American Economic Review 55(5), 1126–1150.Google Scholar
Fuster, L., Imrohoroglu, A. and Imrohoroglu, S. (2007) Elimination of social security in a dynastic framework. Review of Economic Studies 74(1), 113–145.CrossRefGoogle Scholar
Hu, S.-C. (1979) Social security, the supply of labor, and capital accumulation. American Economic Review 69, 274–284.Google Scholar
Krueger, D. (2006) Public insurance against idiosyncratic and aggregate risk: The case of social security and progressive taxation. CESifo Economic Studies 52, 587–620.CrossRefGoogle Scholar
Michel, P. and Pestieau, P. (2013) Social security and early retirement in an overlapping-generations growth model. Annals of Economics and Finance 14, 705–719.Google Scholar
Miyazaki, K. (2017) Optimal pay-as-you-go social security with endogenous retirement. Macro-economic Dynamics 1–18.Google Scholar
Nourry, C. (2001) Stability of equilibria in the overlapping generations model with endogenous labor supply. Journal of Economic Dynamics and Control 25(10), 1647–1663.CrossRefGoogle Scholar
Rangel, A. (2003) Forward and backward intergenerational goods: Why is social security good for the environment? American Economic Review 93(3), 813–834.Google Scholar
Samuelson, P. A. (1975) Optimum social security in a life-cycle growth model. International Economic Review 16(3), 539–544.CrossRefGoogle Scholar