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2014•RePEc: Research Papers in EconomicsOpen access

The transfer paradox in a pay-as-you-go pension system

Kojun Hamada, Akihiko Kaneko, Mitsuyoshi Yanagihara

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Abstract

We examine how international transfer affects welfare levels of a donor with a higher marginal propensity to save and a recipient with a lower marginal propensity to save, when both countries adopt a pay-as-you-go (PAYG) pension system using a one-sector overlapping generations model. A PAYG pension scheme is found to lead to impairment of the donor and of the recipient as a result of the transfer under the dynamic efficiency condition. This is because the transfer increases the divergence in the rate of return between PAYG and private savings.

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We examine how international transfer affects welfare levels of a donor with a higher marginal propensity to save and a recipient with a lower marginal propensity to save, when both countries adopt a pay-as-you-go (PAYG) pension system using a one-sector overlapping generations model. A PAYG pension scheme is found to lead to impairment of the donor and of the recipient as a result of the transfer under the dynamic efficiency condition. This is because the transfer increases the divergence in the rate of return between PAYG and private savings.

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Available abstract

We examine how international transfer affects welfare levels of a donor with a higher marginal propensity to save and a recipient with a lower marginal propensity to save, when both countries adopt a pay-as-you-go (PAYG) pension system using a one-sector overlapping generations model. A PAYG pension scheme is found to lead to impairment of the donor and of the recipient as a result of the transfer under the dynamic efficiency condition. This is because the transfer increases the divergence in the rate of return between PAYG and private savings.

Key concepts: Pension, Economics, Transfer (computing), Welfare, Pension system, Divergence (linguistics), Labour economics, Marginal utility

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