Old Age Pension Reform and Intergenerational Redistribution

Abstract

In today's world, falling fertility and rising life expectancy have destabilized the public pension systems of most developed countries. To immunize their pension systems from these unfavorable demographic trends, many countries have begun replacing their existing pay-as-you-go (PAYG) systems with fully funded ones. This study demonstrates that a fundamental redesign of the PAYG system appears to be a better option. The analysis is based on a simple overlapping generations framework. In contrast to past research, fertility decisions are modeled as being dependent on the financial incentives inherent in the prevailing pension system.