Aging, Myopia, and the Pay-As-You-Go Public Pension Systems of the G7: A Bright Future?
Pecchenino, Rowena A. and Pollard, Patricia S. (2005) Aging, Myopia, and the Pay-As-You-Go Public Pension Systems of the G7: A Bright Future? Journal of Public Economic Theory , 7 (3). pp. 449-470. ISSN 1097-3923
The public pension systems of the G7 countries were established in an era when the number of contributors far outweighed the number of beneficiaries. Now, for each beneficiary there are fewer contributors, and this trend is projected to accelerate. To evaluate the prospects for these economies we develop an overlapping generations model where growth is endogenously fueled by investments in physical and human capital. We analyze individuals’ behavior when their expectations over their length of life are rational or myopic and examine whether policies exist that can offset the effects of aging, should they be adverse. We find that while perfectly anticipated aging is welfare improving and does not threaten the solvency of public pension systems, myopia worsens welfare, puts pension systems at risk, and cannot be easily remedied by public policy.
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