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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.
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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

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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.

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