On the Intergenerational Pareto Efficiency of Pay-as-you-go Financed Pension Systems

Abstract

When a pay-as-you-go financed public pension system is replaced by a funded system or by private savings, it is generally impossible to compensate the pensioners in the transition generation for the loss incurred without making at least one later generation worse off. This is shown in a standard one-sector overlapping-generations model, both for a "small" open and for a closed economy. Our findings imply that the choice between financing methods for social security can not be reduced to the intergenerational Pareto-criterion but necessarily involves distributional conflicts among generations.

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