The political arrangement of pay-as-you-go pension systems in the presence of financial and demographic shocks

We analyze the outcome of voting over the contribution to a pay-as-you-go (PAYG) pension system in the presence of financial and demographic shocks. The impact of shocks on pension contributions and benefits replicates major developments of pension systems around the world. A decrease in the return on capital increases contributions and benefits, while a decrease in the population growth rate increases contributions but it lowers benefits. The first and second moments of the demographic shock matter: in the case of a lower mean or a higher variance, a smaller average contribution results from the vote. In contrast to this, the Ramsey planner sets a higher average contribution when the population growth rate has a lower mean or a higher variance.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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