Economics Working Papers

Publication Date

11-2018

Number

18018

Abstract

Under dynamic efficiency, a pay-as-you-go (PAYG) pension scheme is often described as an “original sin”: It helps the current generation of retirees but hurts future generations because they are forced to save via a return-dominated scheme. Abandoning it is deemed welfare-improving but typically not for all generations. But what if agents are present-biased (hence, undersave for retirement) and the “paternalistically motivated forced savings” component of a PAYG scheme motivated its existence in the first place? This paper shows it is possible to transition from such a PAYG scheme on to a higher return, mandated fully-funded scheme; yet, no generation is hurt in the process. The results informthe debate on policy design of pension systems as more and more policy makers push for the transition to take place but are forced to recognize that current retirees may get hurt along the way.

JEL Classification

H55, D91, D03, E6

Version History

Original Release Date: November 2018

Departments

Department of Economics, Iowa State University

File Format

application/pdf

Length

43 pages

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