Implicit Pension Debt in Pay-as-You-Go Pension Systems: The Stationary and Balanced Case

Gustavo De Santis , Dept of Statistics

This paper revisits the concept of the implicit pension debt (Ipd) in pay-as-you-go (Paygo) pension systems and proposes a few innovations. The first is the representation on a Lexis diagram of all the four versions of Ipd debated in the specialized literature: this greatly helps non-specialized readers to better understand their meaning and the interconnections between them. This framework leads to the second and most important original contribution of this paper. Under stationary and balanced demographic and economic conditions, Ipd can be expressed as the product of three factors: the average pension benefit (P), the number of pensioners (S), and the average age gap (D) between when contributions are paid and pensions are received. The proposed formula sheds new light on several aspects of Paygo systems, including the quasi-capital gains (losses) they are known to produce during expansion (contraction) phases. A brief discussion suggests that these findings and considerations apply, albeit only approximately, to a much broader range of cases than the stationary and balanced one examined here. Finally, the Ipd concept indicates that Paygo systems would be substantially more resilient to demographic changes if they included also child benefits, and not only pensions. While such a transformation would arguably lead to an improvement in the long run, its realization is unlikely due to the high transition costs. In all cases, the proposed framework supports clearer diagnostics and better-informed policy responses to the challenges that demographic ageing and decline pose to pension systems.

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 Presented in Session 109. Ageing and the Future of Productivity