ON THE INFLUENCE OF PAY‐AS‐YOU‐GO FINANCED PENSION SYSTEMS ON SAVING: THE ROLE OF STABILITY
| Published date | 01 November 1994 |
| Author | Klaus Jaeeer |
| DOI | http://doi.org/10.1111/j.1467-9485.1994.tb01133.x |
| Date | 01 November 1994 |
Scorrish
Journnl
OJ
Poliricol Economy,
Vol.
41.
No.
4.
November
1994
a
Scoiiish Economic Society
1994.
Published by Blackwcll Publishers,
108
Cowlcy
Road, Oxford
OX4
IJF.
UK and
238
Main Street. Cambridge, MA
02142,
USA
ON THE INFLUENCE
OF
PAY-AS-YOU-GO
FINANCED PENSION SYSTEMS
ON
SAVING:
THE ROLE OF STABILITY
Klaus Jaeger
*
I INTRODUCTION
Recent research into the effects
of
fiscal policy has been particularly active in
a number
of
areas, albeit without having achieved
a
broad consensus.
However, concerning the impact
of
a pay-as-you-go financed pension scheme
(PAYGO) on the capital accumulation
or
the aggregate saving ratio
of
a closed
economy, various
theoretical
studies (e.g.
,
Feldstein, 1974; Atkinson and
Stiglitz, 1980; Auerbach and Kotlikoff, 1987; Homburg, 1988; Breyer, 1989)
came to an identical conclusion: The introduction
of
a PAYGO
or
an increase
in the (lump-sum) contributions to an existing PAYGO lead-according to
these findings-always to a lower capital intensity, i.e. a decrease in the
aggregate saving ratio in the shortrun
and
in the longrun (comparative-
dynamic steady-state analysis), irrespective
of
the ruling constellation
of
the
interest rate and the growth rate in the economy. This widely accepted negative
relationship between the capital intensity (the aggregate saving ratio) and the
contributions to
a
PAYGO in
a
perfectly competitive economy is derived from
a neoclassical overlapping generations model (each individual lives for two
periods, works in the first and retires in the second period
of
his life) without
intergenerational altruism that is at present standard in the literature (e.g. Blan-
chard and Fischer, 1989). The main assumptions underlying that conclusion are
the stability
of
the respective equilibria and the normality
of
consumption in
both periods
of
the individual life.
The goal of this paper is to show that the above mentioned conclusion drawn
from the traditional overlapping generations device is erroneous. In order to
prove this, it seems necessary to discuss the two standard argumentations for
a
negative relationship which can be distinguished in the literature: One is
based on a stability analysis of the short-run equilibrium in the capital market
(Breyer, 1989) and the other is based on
a
long-run dynamic theory
of
the
capital market, i.e. on a stability analysis
of
the steady-state equilibrium
(Atkinson and Stiglitz, 1980; Auerbach and Kotlikoff, 1987; Homburg, 1988).
After having briefly presented the traditional overlapping generations model in
Section
11,
these two approaches are discussed and criticized in Section
I11
and
IV,
respectively. These sections also contain the proofs
of
our
central proposi-
tion that the effect
of
a variation in the contributions to a PAYGO on the
*
Department
of
Economics, Free University
of
Berlin
358
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