The effects of financing rules in pay-as-you-go pension systems on the life and the business cycle

Christian Scharrer

doi:10.1515/ger-2020-0037

Article

The effects of financing rules in pay-as-you-go pension systems on the life and the business cycle

Christian Scharrer

Published/Copyright: May 11, 2021

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From the journal German Economic Review Volume 22 Issue 4

Abstract

Empirically, revenues of public pension systems are more volatile than expenditures. Therefore, the question arises how the social security authority should buffer its revenues and adjust its contributions over the business cycle. This paper studies the corresponding effects on the life cycle of households and the business cycle in a large-scale overlapping generations model. In particular, the labor supply is endogenous and takes the intertemporal links between contributions and pension benefits into account. Sluggish adjustments of contribution rates that are implemented by adjusting a financial buffer stock both stabilize an economy and decrease the volatility of lifetime utilities of most workers and retirees, in contrast to sole adjustments of contribution rates. However, changes of consumption, capital income, or lump sum taxes, which aim to balance public pension budgets, improve the allocation of aggregate risk across cohorts for people up to an age of at least 71 years.

Keywords: Overlapping Generations; Pay-As-You-Go Pension Systems; Financing Rules; Business Cycle; Life Cycle; RBC-Model

JEL Classification: H55; E21; E30

Appendix A

Fig. A1 displays the impulse responses of output, labor, investment, the real wage, and the real interest rate as absolute deviations from the benchmark case. Evidently, adjustments of contribution rates (Case 3) imply the largest deviations for all variables except consumption in the first periods after a productivity shock.

Figure A1

Impulse Responses of Aggregate Variables (ordinate: absolute deviations with respect to the benchmark case, abscissa: periods).

Conflict of interest: The author declares that he has no conflict of interest.

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Published Online: 2021-05-11

Published in Print: 2021-11-30

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https://doi.org/10.1515/ger-2020-0037

Keywords for this article

Overlapping Generations; Pay-As-You-Go Pension Systems; Financing Rules; Business Cycle; Life Cycle; RBC-Model